Hormel Foods Corp (HRL) — Q4 2019 Earnings Call Transcript

Good morning. Welcome to the Hormel Foods conference call for the fourth quarter of fiscal 2019. 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 hormelfoods.com under the Investors 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 performance for the quarter and our outlook for 2020. 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 an additional question, 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 888-220-8451 and the access code is 1340983. 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 35 through 41 in our company’s Form 10-Q for the quarter ended July 28, 2019 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 the volume and sales impact of the CytoSport divestiture. Discussion on non-GAAP information is detailed in our press release located on our corporate website. Please note that during our call, we will refer to these non-GAAP results as organic volume and organic sales. I will now turn the call over to Jim Snee.

Thank you, Nathan. Good morning, everyone. We had the opportunity to outline our company's growth strategy at our Investor Day in October. Our 2020 path forward, a set of six strategic priorities sets us up for growth in 2020 and well into the future. The six priorities we presented were, one, growing our Deli and foodservice businesses; two, accelerating growth in ethnic cuisines; three, pursuing bold new innovations; four, expanding our global presence; five, protecting our core brands; and six, continuing to transform our company through one supply chain and Project Orion initiatives. These priorities represent another step forward for Hormel Foods as a global branded food company. We made great progress in 2019. Notably, we launched the Hormel Deli Solutions division and Refrigerated Foods; delivered $700 million in sales from our MegaMex joint venture, which also celebrated its 10th anniversary; completed our state-of-the-art whole bird facility at Jennie-O Turkey Store; exited two non-strategic businesses, CytoSport and hog harvest in Fremont, Nebraska; and made tremendous progress on our one supply chain and Project Orion initiatives. From a financial perspective, we grew organic sales by 1%, improved our cost structure and operating margins. Invested over $290 million back into our business with capital projects such as the Burke pizza topping facility and an additional Fontanini production line, raised our dividend for the 54th consecutive year, the 11th consecutive year of double-digit increases. Repurchased $174 million in common stock, the highest annual repurchase in our history. Reduced our long-term debt and grew our cash balance. From a segment perspective, Refrigerated Foods grew earnings in spite of a 50% decline in commodity profits as our value-added businesses delivered strong growth. The Black Label, Bacon 1, Fire Braised, Natural Choice and Applegate brands were all meaningful contributors to value-added growth. Grocery Products had a year of mixed results. We grew organic volume and sales for the year, driven by brands such as Herdez, Wholly and Dinty Moore. I'm also really proud to say SPAM had its fifth consecutive year of record sales, which is a tremendous accomplishment. However, sales and profits declined for SKIPPY as we faced deflationary pricing pressure due to competitive dynamics in the peanut butter category. Our team rallied and did an excellent job using revenue growth management with a number of customers to identify the right pricing and promotional tactics to drive category growth. MegaMex continues to generate excellent top-line growth. From a bottom-line perspective, earnings declined as they lapped a tax benefit and were impacted by higher avocado markets during the year. Jennie-O Turkey Store managed through both industry oversupply and the effects of two lean Ground Turkey recalls. The fourth quarter proved that the Jennie-O brand remains strong and the additional investment we are making in the business is the right long-term decision. This team clearly has momentum going into 2020. The full-year results for the International segment were disappointing as the team encountered numerous challenges stemming from African swine fever in China, the impact from tariffs and global trade uncertainty. These headwinds greatly masked excellent growth in our China business. Looking at the fourth quarter, we delivered earnings per share of $0.47. This put our full-year earnings at the top end of the guidance range we provided at our Investor Day in October. Sales decreased 1% on a 2% decrease in volume. Organic sales increased 2% on a 1% increase in volume. Three of our four segments, Refrigerated Foods, Grocery Products and Jennie-O, delivered organic volume and sales growth. Total company sales growth was led by brands such as Columbus, Fire Braised, Bacon 1, Natural Choice, Gatherings, SPAM, Herdez, Wholly, and Hormel Chili. Refrigerated Foods grew volume 1% and sales 4%. While many products across retail, deli and foodservice contributed to the sales growth, I would be remiss if I didn't call out the growth we are seeing from Bacon 1. The Hormel foodservice team is doing an excellent job growing Bacon 1 account by account. We also recently introduced the product into the club channel under the brand Hormel Thick Cut Reserve. The recent expansion at our facility in Wichita, Kansas is providing the necessary runway to continue growing this important business. Strong earnings growth from our value-added businesses was not able to overcome a 46% decline in commodity profits, leading to a Refrigerated Foods segment profit decline of 3%. Grocery Products volume declined 9% and sales declined 10% due to the divestiture of CytoSport. Organic volume increased 2% and organic sales increased 1%. Center-store brands such as SPAM and Herdez drove sales and earnings growth. Lower pricing on Skippy Peanut Butter remained a headwind this quarter. Jennie-O Turkey Store volume increased 5% and sales increased 3%, primarily due to whole bird and commodity sales increases. Segment profit increased 6% due to operational improvements across their supply chain. As expected, we are regaining distribution on our most important item, lean ground Turkey. We recently gained distribution back at a large customer, but still have work to do to get back to our pre-recall distribution levels. Advertising and promotional activities in select key markets also helped drive growth during the quarter. It's important to note, this quarter represents the first time since the fourth quarter of 2016 that we grew volume, sales and segment profit at Jennie-O Turkey Store. International volume sales and segment profit declined dramatically during the quarter. We saw weakness in our export sales and in our Brazil business due to higher protein prices. We are taking the necessary pricing actions to offset these cost increases. From a total company perspective, we expect to deliver sales growth in excess of our 2% to 3% organic sales growth goal in fiscal 2020. Two key drivers to sales growth across the company are innovation and e-commerce. First, we continue to see innovation successes across our business and remain confident as we close in on the final year of our 15% by 2020 challenge. The percentage of sales from products innovated in the last five years has grown at just under 15%. Products such as Natural Choice Snacks Stacks and Wraps, Herdez Guacamole Salsa, the Applegate Blend Burger and SKIPPY P.B. & Jelly Minis are all important initiatives helping us achieve our 15% goal. Second, our e-commerce capabilities continue to improve, especially for the online grocery pickup segments. Through our efforts in analytics, package optimization and customer expansion; we see another year of strong double-digit growth for e-commerce. We expect to deliver another year of operating income growth in 2020. The biggest risk factor continues to be the impact African swine fever could have on our business. While we have seen volatility in the market, we have not seen a major and sustained increase in pork costs as we and much of the industry expected. A combination of higher domestic pork production, higher levels of cold storage in China and presumably lower Chinese consumer demand are factors keeping prices in check. Jim Sheehan will provide more details related to our market outlook. We are still very confident in our ability to manage through ASF. First, we are very optimistic about the demand for our products whether from an up-and-coming regional pizza chain using our Hormel pizza toppings, a Deli consumer looking for our premium charcuterie items like Columbus craft meats or a family looking for affordable and versatile protein like our SPAM family of products. Second, we hold leadership positions in many of the categories in which we compete. This affords us the ability to be pricing leaders when market conditions warrant. We demonstrated our ability to pass higher pricing during PEDV in 2014 and again during the market run-up in 2017. As a global branded food company and a leader in the industry, we believe it is our responsibility to lead in these situations. Finally, we expect input cost volatility to persist into fiscal 2020. As a net buyer of protein, major market swings can shift profits from quarter to quarter when our pricing lags the market. Looking at the segments for 2020, we expect three of our four business units to show sales and profit growth, with the exception being Grocery Products as they lap the CytoSport divestiture for the first half of the year. We do however expect sales and segment profit growth for the rest of the Grocery Products segment, led by center store brands such as SPAM, Dinty Moore and SKIPPY. We also expect growth from MegaMex and remain extremely confident in our ability to continue growing the Herdez and Wholly brand. I am excited by the authentic and innovative products they are bringing to the marketplace such as Herdez, Refrigerated Guacamole, Herdez Taqueria Street Sauces and Wholly Smashed Avocados. We expect 2020 will represent a return to growth for Jennie-O Turkey Store. A clear focus on regaining lost lean ground Turkey distribution, the efforts to realign our cost structure and slowly improving industry fundamentals gives us confidence we will get this business back in growth mode. International is expected to show sales and segment profit growth in 2020. However, we do expect volatility as we manage higher input costs in China and Brazil in addition to short-term noise related to an uncertain global trade picture. Again this year, we expect Refrigerated Foods will grow sales and profits led by many brands across foodservice, retail and deli. I have a high level of confidence in this team's ability to execute in the marketplace and continue to grow branded value-added projects. At Investor Day, we highlighted the great work happening within our supply chain group. And I am pleased to report; we achieved our $75 million cost savings goal this year. We also highlighted our long-standing key results of holding controllable cost increases to less than 1% over the prior year. While large investments can impact a single year, we have specific targeted actions to improve our cost structure over time. Achieving our 1% key result implies savings in 2020 of approximately $75 million similar to 2019. Taking all these factors into account, we are setting our full-year earnings guidance at $1.69 to $1.83 per share and our sales guidance at $9.5 billion to $10.3 billion. Our expected fiscal 2020 organic pre-tax earnings growth rate is in line with our near-term goal of 5% to 7% organic pre-tax earnings growth we outlined at our Investor Day. As a reminder, CytoSport earnings in 2019 contributed $0.10 to earnings per share. We also expect a higher effective tax rate in fiscal 2020. 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 fiscal 2020.

Thank you, Jim. Good morning, everyone. Net sales in the fourth quarter were $2.5 billion, down 1%. Organic net sales were up 2% with three of four segments showing growth. Sales for 2019 were $9.5 billion, down 1%. Organic sales were up 1%. Pre-tax earnings were $324 million, up 1% compared to the fourth quarter of last year. For 2019, the company grew pre-tax earnings to $1.2 billion, a 2% increase. The full-year effective tax rate was 19.1% compared to 14.3% last year. The 2018 tax rate was impacted by deferred tax remeasurements. The effective tax rate for 2020 is expected to be between 20.5% and 22.5%. Earnings per share for the quarter was $0.47 a share compared to $0.48 last year. Earnings per share for 2019 was $1.80, a 3% decline. The higher effective tax rate contributed to the lower earnings for the quarter and the year. For 2019, SG&A, excluding advertising, was 6.3% of sales compared to 7.2% last year. The decline was due to the impact of the CytoSport sale and lower selling and employee-related expenses. In 2020, we expect SG&A as a percentage of sales to increase. Excluding CytoSport, expenses will increase because of the costs related to Project Orion. Net unallocated expense was down significantly in 2019, resulting from the gain on the sale of CytoSport, lower selling expenses and a legal settlement in the first quarter. Advertising was $131 million, down from $152 million in 2018. The decline was due to the CytoSport sale. In 2020, we plan to increase advertising expense to support our leading brands, including Natural Choice, Black Label, Wholly, Herdez, SPAM, SKIPPY and Jennie-O. For the full year, operating margins were 12.6% compared to 12.4% in 2018. Lower SG&A was a benefit to margins in 2019. In 2020, we anticipate operating margins to be flat, but we may experience periods of volatility due to input costs. We generated cash from operations of $923 million during the year, down 26%. The decline resulted from higher working capital as we strategically built inventory in anticipation of higher input costs due to African swine fever. The primary uses of cash in 2019 were dividends, debt reduction, CapEx and share repurchases. We paid our 365th consecutive quarterly dividend, effective November 15 at an annual rate of $0.84 per share. We also announced an 11% dividend increase for 2020, making the new annual rate $0.93 per share. This marks the 54th consecutive year we have increased the dividend and the 11th consecutive year of double-digit increases. In 2019, we repaid the remaining $375 million in debt associated with the Columbus acquisition. Capital expenditures for 2019 were $294 million, including the expansion of the Burke facility, Project Orion and additional capacity for Fontanini products. We targeted capital expenditures of $360 million in 2020, with a focus on value-added capacity projects and automation. Share repurchases for 2019 totaled a record $174 million, almost double any single prior year. 4.3 million shares were repurchased. We will continue to take a disciplined approach to capital allocations utilizing our strong balance sheet to grow through acquisitions and capital investments. We will remain focused on long-term investments to drive exceptional shareholder return. The generally higher input costs for the fourth quarter were in line with expectations. The 2020 guidance range assumes higher protein prices for key inputs. African swine fever continues to impact the global hog supply as the disease spreads in China, Southeast Asia and parts of Europe. The USDA is projecting exports to grow 7% to 8% in 2020. To meet the growing need for exports, total domestic production is expected to increase 2% to 3% according to the USDA. Our prices are expected to increase in excess of 15% in 2020. We anticipate the USDA composite value increases to be consistent with increases in hog prices. Selling prices in 2020 are projected to be marginally higher with periods of volatility. We expect pork and beef trim markets to be higher in 2020. The Turkey industry is beginning to show signs of recovery. Industry data shows turkey placements down 3% since the beginning of 2019. Additionally, cold storage of whole birds continued to decline leading to improved pricing. Pricing for the fourth quarter was up modestly over 2018. We should see the majority of the pricing benefit realized for the 2020 holiday season. Cold storage of breast meat is 5% below last year. Breast meat pricing has traded near $2 over the past 12 months. We expect the market to improve in the second half of 2020. Other Turkey commodity items, such as fire meat, should benefit from better pricing in 2020 due to supply shortages of other competing proteins. Freight costs which were up modestly compared to 2018 are projected to be marginally higher next year. Project Orion continues to progress on schedule. In the first quarter of 2020, we will begin the implementation across HR, Finance and supply chain organization. We are excited to begin the transformation of our company to increase efficiency and our analytical capabilities to manage our business. At this time, I'll turn the call over to the operator for the question-and-answer portion of the call.

Yes, good morning, everyone. A Happy Thanksgiving to all.

Thanks, Eric. Good morning.

I have a quick question. As Jim mentioned, there was a significant inventory build at the end of the year. How much cost visibility does that provide? Does it cover the first half or a substantial portion of 2020? How should we assess your ability to manage costs in the near term with that inventory?

Happy Thanksgiving, Eric. This is Jim Sheehan. We did build inventory at the end of the year and that will give us visibility on some important primals into the first quarter. So I would say well into the first quarter.

Okay. Thanks. And then just real quickly as a follow-up question on your marketing spend here. It was down sharply for the year mainly due to the divestiture of CytoSport. But you also bumped up your spending in Jennie-O with your burger campaign, which has been very successful. So if you were to look at your marketing spend for the year on an apples-to-apples basis excluding CytoSport, would it have been flat to up, down slightly? I mean, how should we look at that marketing spend number?

For the year, I would say it remained relatively unchanged. One of our successes has been consolidating our advertising budget towards key brands, rather than spreading it too thin. When reflecting on our efforts with brands like SPAM, SKIPPY, Natural Choice, Hormel Pepperoni, and now revitalizing our marketing for Jennie-O Turkey Store in select key markets, our strategy has shifted somewhat. Overall, we are satisfied with the results, and I would characterize the advertising dollars as relatively flat for the entire year.

Good morning, guys.

Hi, Ken.

Good morning.

Just two questions. One is you talked about two projects that you are underway. The plans in the state-of-the-art, the sausage production, as well as pizza toppings, how much capital you put into that? What's the return on that? And my second question would be on the turkey side. It seems like you've gotten more positive on the underlying fundamentals. Is that because of the trade opening? Or can you discuss more on that? And I'll leave it there.

I will start with the second question first. We are optimistic about the turkey business as we enter 2020. The key point is that we are achieving what we aimed for when we spoke to you last quarter. We mentioned the importance of regaining distribution, and we have successfully regained some of it in the fourth quarter. While we have more work ahead for the full year, we anticipate noticeable improvement as the year progresses. Furthermore, we are not only focused on regaining distribution but also on supporting that business with adequate advertising investments that we had reduced over the past few years due to various challenges. Regarding the two expansion projects we discussed, their combined cost will be approximately $300 million. As a reminder, we have already invested part of the funds in the Burke project and have made significant progress. It's important to note that both projects are aimed at enhancing our value-added growth. The new plant in Nebraska is intended to bolster our Columbus business, which has performed exceptionally well, and similarly supports our Burke operations and pizza topping segment in our core foodservice division. We are thrilled to announce these projects and look forward to their impact on the business.

Yeah. Thank you.

Good morning. Thanks for the question.

Good morning.

First, I just wanted to clarify guidance. Your EPS guidance range is $0.14. Your pre-tax income range, I think, can explain about $0.04 of the variance. Your tax rate guidance can explain around $0.05. So I'm getting kind of a $0.05 gap, could you maybe help reconcile that $0.05 gap? And then, also, just give us some clarity on what exactly the base number is for 2019 that we should be applying that growth from?

Yes. Thomas, I think the best way to think about it, in 2019, our results included about $0.10 EPS for CytoSport, which is in our Grocery Products segment profit. And then when you consider that along with a higher tax rate of about $0.03, I mean, that's really where you'll find how our growth is in line with that 5% to 7% organic growth target. So thinking about 2019 actual 1.80, Cyto at 10, tax at 3, gets you to 1.67 number, really as probably a base. And I would say if there's additional information you need, feel free to follow up with Nathan.

Okay. Thanks for that. I'll probably will follow up a little bit. And then, just on the international segment, it sounded like there were two main issues. It was the export side and then rising input costs. On the export front, did you shift some of your pork sales because exports were weak into the Refrigerated segment? And then on the input cost front, you made reference to price increases that you were instituting, sounds like now. What are you assuming in terms of kind of the bounce back in that segment? Are you assuming that exports continue to lag, but you get the pricing flow through? And then is there an offset, as we think about Refrigerated, just given the reallocation? Just trying to understand how that plays out?

Sure. Let me try to help you. When we talk about our export business in international, there's really two components. We've got a strong branded export business, and you would think more around SPAM and SKIPPY, and then our pork export business. So there are two parts. And as we think about 2020, our branded export business is expected to be strong. And although we talked about it being a little bit soft in the fourth quarter, that really was more of a timing issue. When you think about the fresh pork piece that's really driven by everything that's happened in the marketplace. As you think about some of the global reorganization of how pork has slowed, especially throughout the Asia region. And that's going to continue to be a headwind until all of the tariffs and global trade uncertainty get resolved. So that's the first piece, the export piece. The second piece in terms of cost increases in Brazil, we saw kind of a constant run-up throughout the year. The biggest impact really in the fourth quarter. And so we did get a little more aggressive with our pricing in the fourth quarter and then we expect some of those cost increases to moderate next year. But that's really what's driving those comments around exports and input costs in Brazil.

Thomas, back to your first question. When you think about that $0.10 in CytoSport, you should think about it $0.04 came out of Grocery Products, $0.03 was a reduction on net unallocated through the gain. And then there was a $0.03 tax gain. So that's how you can think about the $0.10.

Hi, thanks. Good morning.

Good morning.

I wanted to ask about Jennie-O, really impressive sequential improvement in the results there. And in particular, noteworthy, I thought that you mentioned you'd won back distribution with a large customer. I'm curious to hear what are the factor or factors that are driving that conversion to get distribution back with your larger customers. Do you have to allocate additional trade spend or professional dollars or is it just demonstration of more consistent results and improved execution?

Yes. So I mean, we are very pleased with what the team was able to get done in the fourth quarter. And it's consistent with the commentary that we've provided that when we did lose distribution, the category tended not to perform for the retailer. And that where we did have distribution, the category was performing as expected. And so being able to take that story and remind the retailers of what we're able to do with the leading brand has been very powerful. And then of course, we are supporting it. We've talked about some of the advertising in select key markets. We are supporting it with trade dollars, especially at the outset. But the big win here is the distribution gain as we head off into 2020. Also would remind you that we have more work to do. So we have regained distribution but we have more work to do early in the year and really throughout the year. And then just as a reminder for the Jennie-O Turkey Store business, we are going to still lap some pre-recall sales in Q1. So when you take the total year, we are very, very optimistic about the Jennie-O business, starting with what we've been able to get done in the fourth quarter.

Okay, great. And then a follow-up question on guidance. Just thinking about the top end versus the bottom end of the range kind of the swing factors that dictate that whether it's the timing or magnitude of African swine fever, given that you've considered some implication associated with price inflation and cost inflation there, maybe some of the other key factors that we should be considering as we monitor sort of the progress of the results for the year.

Sure. I mean, you hit on obviously the key risk factor and we talked about that in the comments in regards to ASF is less of an event from an international perspective. If tariffs are lifted and we see a more – well, we would consider a more normalized flow of product. And then the other thing that we just talked about is if we're able to gain back distribution at Jennie-O faster than anticipated. I mean, those are things that really drive us towards the top side. On the bottom side, if the impact of ASF is sustained and steady increases in costs that continue to compress margins as we're catching up with pricing that could be a headwind. But as we talked about that's on the way up. And once costs moderate, we'll be in a much better position. But that's really how we're thinking about the bottom side and top side of the range.

Good morning. Thank you.

Hi, Michael.

I was just away for a moment. I hope I didn't miss someone asking this, but when you talked about the expected increases in protein that you have factored into your guidance, how does that compare to the current situation? What level do you anticipate in a base case scenario?

Certainly. Let's start with hogs. Hogs increased by about 11% in the fourth quarter of 2019, and we expect them to rise by 15% throughout 2020, with higher prices anticipated in the latter half compared to the first half. The cutout value rose by 4% in the fourth quarter, and we believe it will likely increase just under 15%, maintaining a similar trend with higher prices in the second half. Bellies increased by 15% in the first quarter, and we expect low single-digit growth moving forward, remaining fairly stable during this period. Currently, bellies are priced at 132, which is slightly lower now, but there has been significant volatility in the belly markets, leading to notable fluctuations even on a day-to-day basis. The 72% trim, an important input, increased by 9% in the fourth quarter, and we anticipate high single-digit growth in 2020, with expected higher prices in the latter half. Currently priced at $76, the trim has already seen a slight increase from its fourth-quarter levels. This volatility in both trim and bellies will create some fluctuations between quarters, but ultimately, we believe we will be able to recover those costs, and monitoring this volatility will be crucial for us.

Okay, that's very helpful. And then just a follow-up on some of the language in that first guidance paragraph, you mentioned some of the brands that are key drivers of growth. But then you mentioned a few that you're going to put a lot of energy behind. It reads initially like maybe that's not as bullish but your prepared remarks for Bacon 1 certainly sound quite optimistic. How do we think about Bacon 1 and the outlook there? Do you still expect this to grow? And then also the same question for Fire Braised, which wasn't on either list.

Yeah. Michael, I mean, we are very bullish. I mean, all the brands that we had in the press release, I mean, those are the ones that have grown and really are on trend with today's consumer. And not only are we growing the core business, but we're innovating against those. And when you talk about our foodservice brands, especially Bacon 1 and Fire Braised, the growth opportunities for both of those brands in our foodservice space are still very, very strong. We talked about the Bacon 1 growth and how it happens account by account and that's really a hallmark of how our foodservice business operates. It's the ability to penetrate, saturate and dominate the operator community with these key brands. We also have obviously plenty of capacity for Bacon 1 as we completed the expansion of our Wichita, Kansas facility last year to meet the needs for that business. The other thing that we talked about in the prepared remarks is the fact that we're now moving Bacon 1 into the club channel under our Thick Cut reserve brand, where it's met with a lot of consumer acceptance. So we feel good about both Bacon 1 and Fire Braised, not only in core food service and then we didn't even talk about the opportunities that they represent in the deli business for the prepared foods section. So, very bullish on both of those, along with all the brands that we have listed in our press release.

Good morning.

Morning.

Morning.

Look, I have a quick detailed question on corporate expense. So even taking out the gain on sale and all, it was down considerably from 2018 and 2017. I was just wondering, how we should be thinking about that run rate for 2020?

For 2020, I would target it in the $40 million to $60 million range, Heather. It's a small number, so small changes have a big percentage impact. We had the CytoSport gain in 2019. But we've also lowered our selling expenses. We had lower employee-related expenses. Some of the cost-saving programs that we put in place are showing their impact in SG&A. But I would see it in the $40 million to $60 million range.

Thank you for that. My second question is about Jennie-O, which has two parts. Firstly, from my understanding, you are a net buyer of breast meat. Should I consider that if exports for this segment increase, would you prefer to see the dark meat portion of the bird increase more, or would you prefer breast meat to increase?

Yeah. I mean, really, Heather, that changes every year. And, of course, our supply chain people are able to navigate and take advantage of the opportunities. Obviously, there was an announcement in regards to China here recently. We just learned that we have seven of our plants that are approved. We're still working through the details. But at a very high level, we expect that announcement and the opening of the market to be positive for us.

Thanks, and Happy Thanksgiving. Jim and Jim, your forecast indicates a 15% increase in the cutout value for the full year. However, you mentioned that inflation in the second half is expected to be higher than in the first half. Does that suggest a significant increase in the second half? Are you anticipating single-digit growth in the first half, followed by a much sharper increase due to factors like frozen inventories depleting in China? If that's your outlook, how have you prepared your customers for such an increase? I have a follow-up question as well.

That is not how we think about it. We're thinking about it just being a few percentage difference between the first and second half. So we don't see a significant run-up in the market.

From a pricing perspective, if there is a significant increase in pricing, we can refer to what happened with PEDV. During that time, belly prices rose from $1.30 to $2.50 within three months. We were able to implement pricing changes because the market justified it, and our customers recognized that. For instance, the price of bacon increased from around $3.99 to $4.99 and went up to $9.99. This sets a precedent. Depending on how the market influences pricing, we have already discussed this with our customers. We've been talking about ASF for over a year, so it won't be a surprise to anyone.

Okay. Can you give us a little more detail into the fourth quarter itself? One of your competitors said that there was a lot of inflation in bellies and then it kind of all reversed very quickly and that movement made it hard to change pricing quickly enough to react. Did you see something similar for yourselves? Or were you able to adjust accordingly? Or maybe the timing was different?

Bellies averaged about 157 in the fourth quarter and right now bellies are at 132. So you've seen some movement but you've seen volatility in bellies for the last two years. So I wouldn't say that amount of volatility we've seen in bellies in the fourth quarter and early into our first quarter is anything unusual.

Yes. And from a pricing perspective, nothing really to speak of on the retail front. Some adjustments on foodservice but we always talk about how we're able to stay a little bit closer to the markets with our foodservice business but nothing that was overly impactful.

Good morning and thanks for taking my question. So I wanted to follow-up on the happy little plants launch that you guys discussed at the Analyst Day. I was curious what type of retailer and foodservice interest you're seeing so far? And how you guys are thinking about the contribution from this launch this year?

Yes, the contribution from Rupesh will be minimal in 2020. For us, it's really about gaining insights into that space. The feedback from retailers and consumers has been positive. We're noticing increased acceptance in the foodservice area. The foodservice team has effectively introduced the same retail pack to foodservice operators. Additionally, we discussed the blend burger items at Investor Day. It's a combination of both the pure play and the blended approach that excites us. Our agile team is already working on version 2.0 to expand that line, considering different forms for the marketplace. Based on initial feedback, the outlook is positive. We are still working on developing the line, but I wouldn't expect any significant contribution in 2020.

Okay, great. And then a quick follow-up question. So for the full-year guidance, does that at all contemplate share buybacks than the EPS targets?

It does take into account some share repurchase. And we face share repurchase on our intrinsic value of the stock and the amount of stock options that are being exercised offset for dilution. So we do have a number in there. So yes.

Yes, thank you. Good morning, everyone. So a follow-up, Jim Sheehan on the guidance on port costs. And if I heard your comments correctly before, you talked about a 50% increase in hog prices, a 15% or so increase in the cutout values, but then lower increases in bellies and trim as components of that cutout. So should we take that to imply that you think that there's more inflation likely in other cuts of hams, shoulders and butts that would actually present opportunities on the commodity profit side and the contribution that that would present? I'm just trying to understand the piece of that. Because the cuts that you typically would be long seem to be the ones do you think there's more inflation in?

Yeah, Adam. A good example is hams right now. Hams averaged $69 in the fourth quarter, and they've increased to $94 as of late last week. So there's some inflation in hams that usually wouldn't be observed. I believe there are opportunities in some of the other commodities.

Okay. Taking a step back to consider the guidance, I believe you mentioned increases in advertising and SG&A as a percentage of sales year-on-year. Can you clarify what the gross profit margins would have been in 2019 if we completely remove CytoSport? I'm trying to understand the level of gross profit expansion included in the guidance, particularly regarding operating margins. I want to ensure I grasp this in the context of rising SG&A.

We're discussing advertising costs, specifically the increase we expect to see in advertising expenses, which we anticipate will be in the high single digits, excluding CytoSport. Additionally, SG&A will rise due to some implementation costs associated with Orion. These expenses will be unusual compared to our normal run rate. In fact, SG&A will experience some notably high costs because we will begin implementing Project Orion in the next couple of weeks. To add on, for more detailed items, it's best to follow up with Nathan or the corporate team. The key takeaway for us is the pre-tax operating profit growth, which aligns with our organic target of 5% to 7% that we discussed during Investor Day.

Yes. Thank you. Good morning. We've talked a lot about ASF and the impact you expect that to have on your pork export business, I mean, your Jennie-O Turkey Store business. But I'm kind of wondering how you expect that to impact your SPAM business, given the increasing popularity that we're seeing of SPAM in China? And I assume that there's probably some positive demand opportunities, probably some cost risk. But I'd just like to hear the way you're thinking about ASF impact on that brand and kind of what you're expecting for 2020.

Yes, that's a great question. At a high level regarding ASF, we fully understand the situation that leads to higher prices. We've discussed our ability to adjust pricing if we see a larger impact from ASF, both domestically and in our operations in China. The SPAM brand holds significant pricing power and stands out in its category. This year, we did increase SPAM prices based on market trends and the accumulated expenses over the past few years. We have a scenario in place for potential further price increases if necessary. We are monitoring the supply and demand fundamentals closely, and if it becomes necessary to increase prices for SPAM, we will do so. Regarding China, the performance of SPAM there has been exceptionally positive, surpassing our expectations, and we have been able to expand distribution more rapidly than we anticipated.

Okay. As a follow-up, are you experiencing strong growth in the brand in China? Have you seen an acceleration today, or is that delayed due to high cold storage?

Yes. I mean, the growth has been steady, but it has exceeded the expectations, when we model putting in the SPAM line in our plant in Jiaxing, China. We've been able to exceed the distribution growth expectations that we had, even in spite of some of the higher costs.

Hey, guys. Good morning. Thanks for taking my question.

Yes. Hi, Peter.

Jim, just wanted to ask on the sales guidance. I would assume that kind of the high end of the range is assuming some pricing goes through to offset some of the inflation that you're expecting. I guess, what would be helpful though is what kind of demand elasticity are you assuming in relation to any price increases on things like bacon or pepperoni?

Yes, Peter you're right. I mean, we do have the high end of the pricing would be driven by the scenario that results in higher cost coming from ASF. And the elasticity is really varies across business units and varies across brands. What we saw, and again I'll go back and reference what we saw during the PEDV event, where you saw belly prices go from $1.30 to $2.50, retails go from $3.99, $4.99 to $9.99 and we still saw very strong volumes in that bacon category. And so it does vary from category to category, business to business, but we obviously are very incredibly sensitive to that working closely with the retailers and having the brand strength, the brand power that we referenced in our comments and then also having that direct-selling organization in our foodservice business is the opportunity to get in front of the customers and tell the story of the products as a solution versus just the cost.

Got it. Okay, that's helpful. And then maybe just one quick clean up one. On Jennie-O, I mean with Thanksgiving being as late as possible as it could be this year, is there an extra kind of week of shipments that you've got maybe that's spilled over into 1Q that we should be thinking about on the volume side?

No. I mean we haven't really thought about it that way. Just again, as a reminder, we're still lapping some of the pre-recall sales from Q1 of last year as we head into 2020. Really the key takeaway for Jennie-O Turkey Store is this distribution wins for lean ground Turkey. We're obviously working on the next few wins and we've got to bring those across the finish line. Still early but we're really seeing the right signs for this business. And that's why we feel like they have so much momentum going into 2020.

Hey, good morning, Jim and Jim. Just a quick follow-up on the CapEx. So kind of realized last quarter you were guiding for like $250 million for full year. As you said, there were a couple of delays in some of the things and then actually you ended up spending $294 million. Could you elaborate a little bit on that significant increase of what was spent already in the third quarter? Is it all related to the new plan for Columbus? And then if you could lay down a little bit in between what is the Burke pizza toppings, the facility in Nebraska and Project Orion. Can you just split what the CapEx is going to look like, what each segment is going to get from the $360 million in 2020?

Thank you, Benjamin. You are right. The increase we anticipated in 2019 was related to the initial phases of acquiring the property for the Columbus expansion. We initially believed this process would extend into 2020, but we were able to close sooner than expected. You are also correct regarding the three major projects we are focusing on within the $360 million budget: completing the Burke project, the Columbus expansion, and Project Orion. I’ll direct you to Nathan for more details on the specific breakdown of those numbers.

Okay, perfect. And then on the inventory, you've clarified already the increase on purchases to be prepared for ASF. But can you give us a little bit of an idea of how much actually the decrease was because of the divestiture of CytoSport? So, how would have been inventory a year ago, if we would have to exclude CytoSport just to get a clean like-for-like comparison to understand the actual magnitude of the increase?

Certainly. CytoSport inventory ran $25 million in that range.

So on behalf of the team here at Hormel Foods, thank you to all of you for joining us today. To our team members listening in, thank you for all your tireless work that allows our company to be so successful in the marketplace. Your focus on delivering our key results and maintaining our culture of accountability is truly uncommon. Happy Thanksgiving.