Hormel Foods Corp (HRL) — Q1 2019 Earnings Call Transcript

Good morning. Welcome to the Hormel Foods conference call for the first quarter of fiscal 2019. We released our results this morning before the market opened around 6:30 A.M. Eastern. If you did not receive a copy of the release, you can find it on our website at hormelfoods.com under the Investor section. On our call today is Jim Snee, Chairman of the Board, President and Chief Executive Officer; and Jim Sheehan, Executive Vice President and Chief Financial Officer. Jim Snee will provide a review of each segment's performance for the quarter and our outlook for the remainder of 2019. Jim Sheehan will provide detailed financial results and further assumptions relating to our outlook. The line will be open 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 A.M. today, Central Standard Time. The dial-in number is 888-254-3590 and the access code is 1445918. It will also be posted to our website and archived for one year. Before we get started, I need to reference the Safe Harbor statement. Some of the comments made today will be forward-looking and actual results may differ materially from those expressed in or implied by the statements we will be making. Please refer to Pages 7 through 9 and 28 through 30 in the Company's Form 10-K for the year ended October 28, 2018 for more details. It can be accessed on our website. I will now turn the call over to Jim Snee.

Thank you, Nathan. Good morning, everyone. As a global branded food company, we remain focused on our formula for success which includes building strong brands, developing innovative new items, making strategic acquisitions, and creating intentional balance. This time-tested strategy continued to serve us well this quarter as improvements in our branded value-added businesses once again offset significant declines in our commodity businesses. We will continue to be intentional about shifting our portfolio away from commodity products and the associated earnings volatility. Our efforts in brand building continue to pay off as retail brands like SPAM, Denti Moore, Mary Kitchen Hash, Hormel Bacon toppings, Wholly Guacamole, Herdez, Hormel Pepperoni, Natural Choice, Columbus and Applegate all showed solid growth this quarter. Our brands have a number one or number two share in over 40 categories, that is up from 35 a year ago. As you think about the footprint of a retail outlet, there aren't too many places where you won't find a brand or a product owned by Hormel Foods. Our food service business remains robust both domestically and in China. Growth this quarter was led by brands such as Old Smokehouse, Hormel Fire Braised, Jennie-O and Skippy. Our products continue to solve for the challenges faced by operators around the globe. With exciting innovation pipelines, retail brands such as Natural Choice, Skippy, Justin's and Applegate; we'll continue to deliver innovation to the marketplace at a faster cadence than ever before. We continue to be very optimistic about key innovations in food service as well with brands like Fire Braised, and Hormel Bacon 1. This was the first quarter we had sufficient production capacity of Hormel Bacon 1, fully cooked Bacon at our newly expanded Wichita Kansas plant. Our strategic acquisition of Columbus Craft Meat, and the subsequent creation of our new Hormel deli solutions division within refrigerated foods is delivering on our commitment to help retailers create the deli of the future. In addition to the very strong financial performance, I'm also incredibly proud of the work the deli group and all supporting integration functions have done in the past year to put Hormel deli solutions in a position to outperform our expectations this quarter. Finally, our focus on intentional balance was evident as earnings growth in refrigerated foods international and Jennie-O more than offset a decline in grocery products. Looking at the first quarter, we delivered earnings per share of $0.44, a 21% decline compared to last year. Recall that last year's results included a large one-time benefit from the Tax Cuts and Jobs Act. We grew pre-tax earnings by 1% as three of our four segments delivered earnings growth. Three segments also delivered sales growth resulting in increased sales of 1% on volume growth of 1%. Refrigerated foods grew sales 2%. As I previously mentioned, our new Hormel deli solutions division delivered excellent results led by Columbus branded items and Jennie-O Premium deli meats. Our growth in the deli channel was balanced as all three focused areas; grab and go, prepared foods and behind the glass showed improvements for the quarter. Refrigerated foods grew earnings 3% even as commodity profits declined 70%; this represents a fourth consecutive quarter in which branded value-added product growth has more than offset a dramatic decline in commodity profits. And there are two brands that are playing an important role in the performance of refrigerated foods. The first brand is Hormel Pepperoni. Over the past few years, we have increased the media spend on this brand and our consumers are responding. According to IRI, our baseline volumes are up 10% in the past quarter. Hormel Pepperoni has also generated a compound annual growth rate over the last three years of 2% as we continue to gain new points of distribution. Like our iconic SPAM brand, Hormel Pepperoni is another example of how we can continue to grow a 100-year-old brand. Next, the Applegate brand. We have known for quite some time that there was an opportunity in both food service and value-added fresh pork to leverage this market-leading brand. The combined team of Applegate, Hormel Food Service and the Hormel Fresh Pork Group have been able to make excellent progress in expanding the Applegate brand beyond their current product lines. In food service, we are making inroads with colleges and universities, healthcare facilities, and other key customers and lodging. We are also starting to sell value-added fresh pork items allowing us to improve the efficiency of our natural and organic raw material supply chain. Grocery products sales increased 1% on a 3% volume increase. Brands such as SPAM, Denti Moore, Mary Kitchen Hash, Hormel Bacon Toppings, Herdez and Wholly Guacamole generated excellent sales growth. The gains in these brands offset declines in contract manufacturing. Segment profits declined due to the effect of a non-operating tax benefit in our MegaMex joint venture last year. We also had a legal settlement this quarter, which compensated us for lost profits and offset part of the tax benefit last year. International sales increased 2% on volume growth of 1%. The SPAM and Skippy brands showed solid growth this quarter for both our export business and in China. Our business in China grew many product lines including refrigerated retail and food service products, SPAM lunch and meat and Skippy peanut butter. Our launch of the SPAM brand in China is exceeding expectations and our in-country team continues to make excellent progress growing households and points of distribution. International segment profits increased 1%, the progress we made in branded exports and in China exceeded the steep declines in fresh pork exports. Global trade uncertainty continued to impact our fresh pork exports. Jennie-O Turkey store volume sales and profits were flat for the quarter. We saw solid sales growth from our food service and commodity divisions, but those gains were offset by lower retail sales. We are starting to see incremental improvements in the Turkey industry, driven by lower pork placements and lower cold storage levels. We have yet to see meaningful improvements in commodity prices. During the quarter, we issued two voluntary recalls for lean ground turkey due to the presence of Salmonella. This resulted in a 10% decline in scanned retail sales volume of lean ground turkey during the quarter. The issue of Salmonella isn't new and it is an industry issue. We plan to continue our leadership role in the effort to reduce Salmonella and to educate consumers on how to safely handle and prepare raw turkey. Even though we experienced the rebound in sales after the recalls and have confidence in the long-term growth of lean ground turkey, we are being very conservative on our sales outlook. Additionally, the extreme cold weather this winter will adversely impact raw material costs in the next two quarters. We will continue to focus on improving our turkey supply chain and investing in the Jennie-O brand. But because of these recent events, we expect Jennie-O Turkey store to fall below the plan we had for them this year. We are encouraged by the outlook for refrigerated foods, grocery products, and international. We expect deli food service and our China business to outperform our expectations. As we announced on Tuesday, we signed a definitive agreement to sell the CytoSport business to Pepsi. The CytoSport team should be pleased with the gains being made in the innovation space with the creation of the evolve product line, muscle milk bars, and multiple new flavors and formats for the muscle milk product line. The team also generated nice growth in the food, drug and mass channel. However, it became apparent that Pepsi was the right long-term owner of this business given their expertise and scale in the beverage space. Pepsi has been a long-standing distribution partner for CytoSport and the muscle milk brand which puts them in a strong position to grow this dynamic business. Jim Sheehan will provide more information regarding the financial details of the pending transaction. We are reaffirming our full-year earnings guidance at $77 to $91 per share and our sales guidance at $9.7 billion to $10.2 billion. This does not include any impact from the pending CytoSport transaction. At this time, I will turn the call over to Jim Sheehan, to discuss our financial information relating to the quarter and key assumptions for the remainder of fiscal 2019.

Thank you, Jim. Good morning, everyone. Volume net sales and pre-tax profit for the first quarter were up 1% compared to 2018. Volume was $1.2 billion with growth primarily coming from grocery products. Net sales of $2.4 billion and pre-tax profits of $307 million resulted from the strong performance of value-added products in refrigerated foods and international. Net earnings for the first quarter were $241 million down 20% compared to last year. Earnings per share were $0.44 down from $0.56. First quarter earnings in 2018 included a benefit of $0.12 per share related to tax reform. Results were negatively impacted by $0.02 per share related to the sale of the Fremont facility. Expenses included the cost to move value-added equipment out of the facility and various pension-related items. These expenses were recognized in net unallocated expense. SG&A, excluding advertising was 6.6% of sales compared to 7.7% last year. The decline was due to a benefit of $0.02 per share from a legal settlement. This settlement was primarily recognized in net unallocated expense and the grocery products segment. Advertising for the quarter was $39 million compared to $40 million last year. Advertising investments are expected to remain consistent with our prior guidance as we support brands such as SPAM, Hormel Pepperoni and Wholly Guacamole. Equity in earnings declined reflecting the impact of a MegaMex non-operating tax benefit last year, and lower earnings from international joint ventures. Operating margins were 13%, unchanged from last year. The effective tax rate for the first quarter was 21.3% compared to 0.6% last year. The increase was primarily due to deferred tax re-measurements in 2018 as a result of the tax cuts and jobs act. The effective tax rate for 2019 is expected to be between 20.5% and 23%. For the quarter, capital expenditures were $39 million compared to $54 million last year. We anticipate full-year capital expenditures to be $350 million. We paid our 362nd consecutive quarterly dividend effective February 15 at an annual rate of $0.84 per share, a 12% increase over the prior year. Share repurchases for the quarter were $45 million, representing 1.1 million shares. We will continue to repurchase stock to offset dilution from stock option exercises and based on the internal valuation. As expected, hog supplies have increased and domestic pork prices have declined due to the abundant supply of protein on the market. Based on the supply structure, after the sale of Fremont, less than half of pork raw materials will be sourced from the Austin harvest operation. This structure reduces the impact of hog costs on the business. Commodity profits in refrigerated foods declined 70% due to higher contracted hog costs. The sale of the Fremont plant did not materially impact commodity profits this quarter. Loaded hog markets were down 19% while the USDA composite value declined 12%. Both markets were down significantly relative to the five-year average. Hormel's hog cost exceeded the market due to a higher mix of frame-based contracts used during the quarter. Belly prices and beef trim were flat compared to last year while 72% pork trim prices declined 27%. Industry data shows improvement for turkey. Both placements continue to be lower and breast meat cold storage has declined. Recipe prices were 36% ahead of last year but remained below the five-year average. Big costs were up slightly in the first quarter. Our outlook for input costs remains unchanged with continued volatility due to global trade uncertainty related to African swine fever and tariffs. Regarding the CytoSport transaction, the purchase price is $465 million subject to adjustments at closing. The transaction is expected to close in the second quarter. Sales in 2018 were approximately $300 million with an operating margin slightly below the total company. We expect the sale to impact ongoing earnings by approximately $0.03 to $0.05 per share for fiscal 2019. We expect a gain on the sale of $0.06 to $0.12 per share in the second quarter. Combined, the full-year estimate is expected to be a net $0.02 to $0.09 gain. Current guidance of $77 to $91 assumes no impact from the sale of CytoSport. We will update the impact of the sale and guidance after the sale is final. This quarter we started project Orion, a strategic initiative that will streamline and transform how we operate as a global branded food company. Hormel Foods currently runs multiple independent on-premise support systems. The goal is to create a unified Oracle cloud-based platform that brings the conveniences and technology of our everyday lives to the business environment. Our supply chain and HR teams will benefit from integrated systems with new capabilities. The finance organization will benefit from the transition of the on-premise Oracle financial system to the Oracle cloud-based platform, including the use of robotic process automation. Systems will be simplified and modernized, giving our teams the actionable and timely data needed to derive deeper analytics and gain insight into our business. This project will generate efficiencies across our entire company and represents the next step in the execution of our long-term growth strategy. Our phased approach will allow us to see benefits this fiscal year and in future years. At this time, I'll turn the call over to the operator for the question and answer portion of the call.

You've talked about the value-added portion of the portfolio being a driver for growth, and yet you've also said that you're holding your advertising spend constant. How should we think about your brand building? And as that becomes not only a bigger part of the portfolio, but a bigger part of the growth, why wouldn't you think about increasing your marketing levels?

Michael, the way we think about it is there's a lot more to brand building than just advertising. Certainly, that's a key part of it. But when you think about how we align price, promotions, advertising, what's the right assortment and also just improving efficiencies as we deal with customers and retailers, those are all very important. We feel very comfortable with our spending levels across our brands and are very confident that the spending levels that we have are enough to support our strategy of increasing the value-added portfolio. So it is more than just advertising.

Would it be right to say that you might have with the Deli group a little bit higher selling costs, but that that's also one another lever that isn't obviously advertising?

We have a direct selling organization in the deli space, which you would assume is a higher cost, but certainly from our perspective, it's a more efficient and more important selling organization. It's an approach that we use across our food service business, our consumer product sales division, and now with the creation of our deli solution. So it's an important part also of all those things that we talked about; the price promotion, advertising, assortment, the salesforce is critical to our success in deli as well.

Good morning, everyone, and thanks for the question. Just a quick, maybe I missed this; this is probably for Jim Sheehan. Jim, did you quantify the amount of the insurance gain in the quarter? I mean it looked like your unallocated corporate wasn't hugely different year-over-year. And where would that number have gone into? Would it be in grocery or how would that show up?

Thank you, Eric. The legal settlement, we quantified to be about $0.02. Now I would point out that that's a gross number. We did incur expenses during the quarter too regarding this issue when there was some lost profit in the quarter. The impact on grocery products was less than $0.01, which is where we split up between grocery products and net unallocated.

So it's kind of a split in between all that. Okay. And then I know this might be sort of a more of a specialized question, but in your prepared comments, you mentioned that you were seeing some higher costs due to cold weather here. A lot of snow in the Midwest. I think in Jennie-O. Back five years ago when we had that issue, you basically ran your goal of houses with LPs I recall. And you were at that time going to start making an effort to try to get as much natural gas into some of those facilities, etcetera. Where do you sit on that and is LP still a higher cost item, is that an issue yet for running your girl on houses in your turkey division?

Eric, it's not an issue. And we made good progress around natural gas, but obviously there's still some LP in the system. Really, the bigger issue was getting birds into the facilities. We've been in the middle of this polar vortex that everyone's talking about, and it has been problematic just really from getting the birds into the facilities. That's what we're talking about.

Eric, I want to follow up on your question. You also asked where we would have been with SG&A without these adjustments. Remember last year we also had a transaction in SG&A. If you look at our SG&A, it was down slightly from last year when you take off your adjustments.

So first, just a quick question on CytoSport. So when you update your guidance, I want to make sure I understood. So it would be an estimated $0.03 to $0.05 diluted to ongoing earnings, but then there would be a gain on sales. So when y'all update your guidance once a transaction closes, are you going to include that gain on sales? Like, so should we expect your guidance to go higher?

Yes, we will give you guidance based on GAAP numbers but we will make it clear enough so that you will understand how much the gain on the sale is.

And then going back to Jennie-O; I was on another call and I think I missed some of this commentary, so I apologize for making you repeat. But the reduction and your guidance as well as the week are showing in the quarter, how much of that was due to weakness and the more commodity, the hand part of the business and how much of it was related to lower demand because of the recall?

Heather, the quarter was actually shaping up to be a good quarter for us. Then we did have the recalls, and as we talked a little bit about the polar vortex, but food service had a good quarter. Our commodity sales were positive. As a reminder, we did move Jennie-O deli turkey to refrigerated foods and we had a good quarter there. It really was the retail lean ground business and that was impacted as we said down 10%. We did see some spill over into other products. So I mean the recall really is what set us back for the quarter.

So first one had asked you about some of the pricing changes that you guys have made over the past few quarters. I was curious how they've played out versus your expectations and whether you've seen the expected volume impact associated with those pricing changes.

Sure. Probably the closest in a more CPG-like pricing we've taken was on Hormel Pepperoni and the volume has actually exceeded our expectations. We talked a little bit in our prepared comments about the success that we've had with that 100-year-old brand, that 100-year-old business. So, having the number one number two brands certainly gives us a lot of brand power and pricing strength. That has played out; if you called back a little further, we had taken some increases across our grocery products portfolio. And again, those all exceeded our expectations. We feel good about where we are in a pricing environment right now.

And then second question on the commodity profit decline that we saw in refrigerated foods, I was just curious if you can give us any thoughts in terms of how you're thinking about this hand wind for the balance of the year.

The biggest impact on the profitability was the hog costs. We buy hogs on a variety of formulas including the Western cutout, the Western corn belt cutout and grain-based formulas. The grain-based formulas were significantly a higher cost formula than the Western corn belt or other programs right now. So we will see some increase in the hog cost as we go forward. We think we'll see some recovery in the market so that the difference between the programs won't be as great as they were in the first quarter. You're starting to see them even out a little bit as we've gone into the second quarter, if that helps.

I guess, first, I want to just make sure I'm understanding on the outlook and the different pieces, what has changed and any order of magnitude kind of for how much the Jennie-O outlook has been trimmed. And if you could dissect that between costs, kind of weather impacts and lower retail sales, that'd be helpful. And then just the other businesses to offset to keep the full-year outlook unchanged was trying to make sure I understand the magnitude of the different pieces.

Adam, so I think what we would tell you is the outlook for Jennie-O Turkey store we’re now moving that to our flat to slightly down, and the other businesses that we talked about that are really going to show growth or overperform, we talked about the deli business, which is off to a great start in the first quarter food service continues to deliver, and then the success that we're seeing in China. So, we have the right offsets there to maintain the guidance for the full year. As you get into some of those more maybe specific questions, you might want to take that offline with Nathan and he can probably add some additional color for you.

And then as a follow-up, I'm just trying to get an update since on how you're planning for the impact of ASF across both your Chinese business and your U.S. business over the balance of the year number of cases continues to grow, could start having a more meaningful impact on hog and pork prices in China as you move through the year would guess it was a benefit this quarter and just how that progression lays out, it would be helpful.

Sure. We expect it to have a positive impact in future quarters as well. There's available meat in China as a result of ASF and it is at competitive prices. We are being very strategic and intentional on the supply side of the business. That'll carry us through just about the balance of the year. So we feel really good about the input cost side of the China business. But I will tell you the other side of the story is the sales side. So really seeing the growth in the refrigerated retail, refrigerated foods service, the Skippy business, the continued implementation of our SPAM presence there, all of those are going really well. You know, when you think about the rest of the globe clearly like everybody else, we're monitoring the situation closely. It's really too hard to say. For us, focusing in China and controlling the things that right now we can control, and we feel like we're in a really good place.

But is it fair to say that if you move later in the year and start to see an impact on pork prices in the U.S., that could potentially offset things?

I mean, it's hard to say. I mean, if you go back to what happened during PEDV, you're going to have a lot of moving parts. So we don't want to get out too far ahead of ourselves. Clearly, we could have some benefit. We talked about the steep decline in our international exports. We could have some benefits there. So, I hear what you're saying, but it's still too early to give a good read on that situation.

I wanted to first kind of ask on the balance sheet following the sale of CytoSport, you're approaching a net cash balance. I know you can't get too specific, but any color on the M&A pipeline and also where you have the internal bandwidth to take on new businesses, I would assume, for instance, the deli operations have a good bit on their plate already.

That's a fair assessment, Thomas. We continue to be very, very active looking for impactful M&A. The areas that we've talked a lot about are our desire to continue to add on to our very strong food service presence. We have capacity in our international business to do more. And then I think even in our domestic grocery products segment, we believe that with some of the M&A activity that's taken place, there will probably be some carve outs. We also want to be very intentional about our ability to expand our MegaMex business. That's a business that's done really well for us. It's on trend and we'd love to get bigger faster there. So we've got a number of different places where M&A can fit and we are being very, very active.

And I had a quick follow-up on the ASF situation. So my understanding, you mentioned that kind of near-term supply was being aided, I guess in part because you have farmers kind of pushing forward slaughter for some of their hogs. But I guess I was a little surprised that you thought that that would endure for much of this year. How long can that kind of excess supply linger in China? Maybe at what point do you think it kind of reverses?

I don't know how long the market will last. I guess what I was saying in terms of our position on what we have in our supply chain to secure our business for the balance of the year. I have not received an update or an outlook on what that looks like in China, but I will tell you that we feel good about our own supply chain to support our business through the balance of the year.

I have a couple of questions. One is on Skippy. I noticed you didn't mention it in your press release as a brand that grew. You also indicate that you were up and your biggest competitor has had some real big market share declines and now they announced price cuts. Can you give us an update on what's happening with Skippy and how you might have to react to your competitor lowering price? And then I had a question on cash flow. Cash flow was strangely down a lot in the first quarter. It looks like there's something going on the working capital side. Can you give us a little more color on that?

Sure. I'm going to let Jim Sheehan handle the cash flow question first, Rob and I'll follow up on Skippy. Good morning, Rob. The big impact from the operating cash flow was the fact that this year our hog producers did not defer as much of their payments into the next year. Last year, there was an extremely large amount of deferral, even into the second and third quarter of their payments from the hogs that they had delivered the prior year. That was down drastically this year. And that's the impact that you're seeing in the operating cash flow.

Let's talk about Skippy. Your first question or comment, and we didn't talk about it, obviously, we had a laundry list of brands in our prepared comments that we did talk about. So, Skippy certainly would have had a place in that list of brands because we have continued to see growth. As you mentioned, over the last 12-52 weeks, we've maintained our share; we're actually seeing some growth while the number one or share leader is down slightly. Clearly, there's growth in the private label space. From our perspective, we're a bit disappointed with the competitive dynamics. We knew this was coming and we are in the process of responding accordingly. We've been here before; we had a similar situation several years ago. I believe that we emerge out the other side as a stronger brand and a stronger business. And I would just say when it's all said and done, we do believe that the brand matters. The brand is important, and that really trying to compete with private labels on price is not a winning strategy over the long-term. But make no mistake about it, our teams understand what happened. We're in the process of reacting and responding accordingly. And in that response will be our continued focus on innovation. We've talked a lot about taking peanut butter out of the jar since we acquired the business. And we've done that with Skippy Fruit bites, different formats. And now, of course, we're in the midst of introducing our Skippy PB&J minis, which are just starting to roll out. But again, early reads are very positive. So, they’re really good about the business and the brands, and we'll manage through this situation as appropriate.

Your tone regarding Skippy seems more negative than with CytoSport. Perhaps I'm interpreting it incorrectly, but what is going on with that?

Let me clarify that. That was not intended, the tone should be positive.

But looking forward, are there retailers expanding shelf space for private label? Is that the problem that's hurting the category?

Well, I mean I think as you look at points of distribution and what's happened with private label, what's happened to the number one leader, I think there's a direct correlation. What I would tell you is we've held our own in terms of points of distribution, which has really allowed us to maintain that share and deliver growth. So I mean, that's why. Again, I just want to reiterate, the tone is not negative, Rob. The tone is very positive about Skippy and the things that we have going on, the pipeline of innovation; we feel really good about the business.

I just want to ask about the other question. The advertising levels. I mean I know CytoSport is excluded from earnings guidance for the moment, but does your advertising guidance reflect the fact that business will be gone? I know you had plans to support sales in 2019, but presumably you no longer have any plans, marketing investments in the second half baked into your guides or is it all kind of rolled up into that three to five going number?

So, Jeremy, right now the guidance that we've given just assumes business as usual. So everything is still in that number. When the deal closes, we will provide updated guidance and clarity around the business.

Got it. Okay. On the refrigerated foods volume down 1%, first, is that an organic number? In other words, does that include the sales transfer from Jennie-O in the quarter? And if it is, can you unpack that number between the ongoing strategic harvest reductions and just the general demand environment?

Sure. Jeremy, the biggest cause of the reduction in sales had to do with the harvest production. And you are looking at life numbers, so both the prior year and current year have the adjustment of deli going into refrigerated foods. Just going into refrigerated foods.

Got it. Maybe just the last question, where are you with the $75 million in targeted savings, and does the disposition of CytoSport change that guidance or change what you can achieve this year?

We are still on track and working hard to achieve our goals. We are committed to our targets. Much of what we discussed in Q4 is still applicable regarding both short-term and long-term solutions our team is pursuing. One key initiative that will significantly benefit our team, as Jim Sheehan pointed out in our prepared remarks, is Project Orion, which aims to modernize and optimize not just the supply chain and HR but various operations as well. This will be a great asset for our team, and we feel confident about our position from a supply chain standpoint.

Just a follow-up on Rob's question; so in terms of Skippy side of it, you are going to hold steady and not react and focus more on brand building in innovation. Is that the expectation?

No, not at all. I mean from our perspective, Ken, I mean we have to digest what we heard; you've got to understand how it's going to impact retailer by retailer and we will respond accordingly. So could it be aligning price promotions, increased advertising, I mean there are a lot of things there; so the idea that we're just going to stand pat and hope for the best is not at all correct. So we will respond accordingly, but we will do it in what's in the best interest of our business.

And you don't think the reaction is enough to change one way or the other way the outlook for your visitors. Is that a fair assessment? So basically, you say it is somewhat contained or that you can offset it with other parts of your business that would outperform; is that fair?

I believe that we are still in the early stages and need to fully understand how this will affect our customers. Announcing a price reduction is one thing, but we need to observe how it actually manifests—whether it's apparent on store shelves or just affects margins. There are many factors at play that we need to monitor closely. Yes, absolutely. We have invested significant time and will continue to do so in the Skippy business, which is very important to us. We have discussed our increased success with Applegate, and our innovation efforts will remain focused there. We are also doing considerable work in our food service sector, achieving great success with a variety of products, and we are dedicating attention to our Justin's brand as well; this is happening across many of our businesses. Recently, we have highlighted successes in our MegaMex portfolio, particularly with our Guacamole salsa, as well as with natural choice snacks, stacks, and wraps. I mentioned Skippy with the launch of the PB&J minis; these items are already in the market, and we have strong pipelines supporting all of those brands.

So just to follow-up, two questions. First, in the refrigerated foods segment, clearly you show that the segment profit was up nicely. Can you still quantify how much that had to do with the fact of being less integrated on the pork business and basically taking more advantage of the availability of fresh meat to put it into your prepared stuff into the bacon things and the Applegate products and so on? So that will be my first question. So how much of an impact did you see from having one plant left operated by yourself?

The Fremont impact in the first quarter was fairly neutral. So when you look at the sourcing cost on the carcass value compared to the prices that we were paid in the comp costs to operate; the impact was neutral, but I would say that one of the areas that we will see a longer-term gain is the ability to focus on the value-added products and not having the resources tied up with that commodity operation.

And then, one question I wanted to follow-up on the supply chain integration, the project you've been running. Can you update us on how you're doing there? Where you see maybe issues if you're on-track or not because I haven't found anything in your prepared remarks about the supply chain? You mentioned the project into technology and so on which has to do with it but an update of the status quo that would be much appreciated.

Sure, Ben. As I said a little while ago; I mean, we're on-track and committed to the target we provided on the fourth quarter call. We do think that project Orion will be a technology catalyst to help our efforts as well, and there are a number of short-term things that we're working on. We continue to work on freight-related issues thinking about network optimization, maybe structural changes. So, I mean the team continues to be hard at work and really the bigger message is we're committed to the $75 million.

I have two quick questions. Jim Sheehan, you mentioned earlier that on the pork side, some of the traction was due to grain-related hog contracts. Did you say there was a greater proportion of those this year compared to last year, or was it just how the impact played out? As we look further into the year, and considering that supplies are expected to tighten, do you still have significant exposure to the western corn belt, or are you now more focused on grain base?

Our exposure to the western corn belt and all of these contracts have decreased with the sale of Fremont. As we change the source of hogs, as we close Fremont; there is going to be some short-term imbalance where we need some time to rebalance our contracts, as contracts come due and we renegotiate those contracts. So right now we have a heavier percentage of grain based contracts than we did last year at this time. And with the volatility that you've seen in the hog prices, the grains obviously have not decreased in cost at the same rate as the hog prices have, so that's creating the imbalance right now but we are actively managing our contracts right now that will adjust our supply base to a more balanced approach across all of those multiple formulas.

A more balanced approach similar to what you had last year pre-Fremont sale?

I would say pre-Fremont sales, the item to consider is that it affects all of the free, but the value we get from Fremont is based on carcass value; so we have to take that into account as we negotiate new contracts for Fremont or for Austin.

Okay. My second follow-up is about the bacon business. Bellies have been very weak, and there’s more promotional pricing in that area at retail. From what I understand, your capacity is somewhat limited there. What are your thoughts on the increasing promotions in the category and how do you plan to respond?

I mean Heather, we’ve talked a little bit about categories and revenue growth management so it is all of those things with pricing and promotion and advertising. So I tell you in our bacon business is still very healthy; both on the retail and food service side. We referenced our food services business, Bacon 1 in our prepared comments but the expansion of that Wichita Kansas facility also opened up some capacity on the retail side of the business for us. So, from a capacity perspective, we're in a good place and we clearly understand all of the category dynamics and are managing it very effectively to be able to deliver continued growth in that space.

Okay, thank you so much.

One other quick question, thanks for the follow-up. It's really about CytoSport and I understand that Pepsi handles all the distribution into the convenience channel. However, I think you would hope that this acquisition also enhances your exposure to leverage that channel, and it seems you might feel underrepresented in that sales channel. How do you view that channel going forward, considering you may not have received significant benefits from it? To gain exposure, will you need to make additional acquisitions, or how does the convenience channel relate to CytoSport now that it is no longer part of your portfolio?

Eric, I thank you know the convenience store channel in the service that Pepsi provided on the beverage side, you know it was really going to be hard for them to take us anywhere else in the C-store space. You know as we think about that channel, I mean we do quite a bit of business there on a number of different fronts. You know we have some of our mega mix portfolio is there in the grab-and-go space. C-stores become more of an almost a traditional food service operator if you will. A number of our items with a number of customers are going into their commissaries to support that growth and we can do that through our food service organization. So between our food service organization and our efforts with our mega mix team. I mean we have an effort against the C-store channel; you're just not going to see Hormel products in the beverage cooler obviously, but you know if you think back we did everything that we thought we were going to do when we acquired that business you know in terms of expanding distribution, did a really nice job with food, drug & mass. With innovation, what we did with our evolved brand with the bar business and in capturing synergies. So what we did all those things, I think that the bigger issue, the key takeaway for us was that you know we didn't have control of that biggest part of that supply chain, so DST distribution and on the ready-to-drink manufacturing side. So really became more difficult to control your own destiny. And so we obviously evaluated our options and it's clear Pepsi's the best long-term owner of that business so you know we have nothing to apologize for, we feel really good about the business and how we ran it when we had it and I think it'll be fun to see Pepsi really lean into that business now.

Yes, good morning. On behalf of the team here at Hormel Foods, we want to thank all of you for joining us today and as always, a big thank you to all of our team members around the globe for all of their hard work. With that on February 1, we were saddened by the news of the passing of Dick Knowlton, Former Chairman of the Board, President and CEO of Hormel Foods. We offer our deepest condolences to all of Dick's family, and want them to know that he will be remembered as a great leader, ambassador, and gentleman. Thank you for your time today.