Hormel Foods Corporation (HRL) Q4 2011 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Hormel Foods Fourth Quarter Earnings Conference Call. [Operator Instructions] This conference is being recorded today, Tuesday, November 22, 2011. I would now like to turn the conference over to Kevin Jones, Director of Investor Relations. Please go ahead, sir.

Thank you to Dale. Good morning, everyone. Welcome to the Hormel Foods conference call for the fourth quarter of fiscal 2011. We released our results this morning before the market opened around 6:30 a.m. Eastern Time. 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 Jeff Ettinger, Chairman of the Board, President and Chief Executive Officer; and Jody Feragen, Executive Vice President and Chief Financial Officer. Jeff will provide a review of the operating results for the quarter and the year and our guidance for fiscal 2012. Then Jody will provide detailed financial results for the quarter and the year. The line will be open for questions following Jody's remarks. [Operator Instructions] An audio replay of this call will be available beginning at 10:30 a.m. Central Time today, November 22, 2011. The dial-in number is (800) 406-7325, and the access code is 4482517. It will also be posted to our website and archived for 1 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 cost and availability of raw materials and market conditions for finished products. Please refer to Pages 33 through 39 of the company's 10-Q for the quarter ended July 31, 2011 for more details. It can be accessed on our website. Now I'll turn the call over to Jeff.

Good morning, everyone. Bearing in mind that all of the quarterly comparisons were affected by the return to a normal 13-week duration versus last year's 14-week fourth quarter, we are pleased to report solid results. Earnings per share for the fourth quarter were $0.43, down 4% from a year ago on sales of $2.1 billion, up 2% from a year ago. We generated segment profit increases in 4 out of 5 of our operating segments. Tonnage was down in comparison with last year's 14-week quarter, but we held our own in the face of significant pricing actions. Further impacting this volume comparison was the shift of significant whole bird sales at our Jennie-O Turkey Store segment into earlier quarters. For the full year, earnings per share grew 19% to $1.74 over the U.S. GAAP earnings of $1.46 per share in 2010. Sales reached $7.9 billion for the full year, up 9% from a year ago, with all 5 segments registering gains. I will now take you through each segment. Our Grocery Products segment contributed nicely to our solid Q4 results, with segment profit up 3% and sales down 2%. For the year, segment operating profit was up 4% and sales were up 2%. Segment profit during the quarter and for the year was adversely impacted by higher raw material cost. Products register and sales gains in the quarter included such stalwarts as our SPAM family of products, Hormel bacon toppings, Dinty Moore beef stew and Hormel Mary Kitchen Hash. Our MegaMex Foods business also contributed to our Grocery Products results and they supported their Herdez, CHI-CHI'S and La Victoria brands with advertising during the quarter. We have also been pleased with how the Wholly Guacamole refrigerated dips and related products have contributed to our growth. We are encouraged by the progress we are making with the rollout of the new items and packaging for our Hormel Compleats microwave meals. Dollar sales were down a bit on flat volume, but this was largely due to stronger promotional efforts associated with the rollout, not to mention the comparison with the 14-week quarter. Our Refrigerated Foods segment operating profit declined 19%, with sales up 1%. For the full year, operating profit in this segment was up 6% and sales increased 10%. Pork operating margins in the quarter were up against a very difficult comparison, with historically high margins a year ago. Those margins have declined, while pork prices have remained at elevated levels, pressuring the margins of our value-added products. Nonetheless, our meat products group had some sales performance that did solidly in their product portfolio, led by Hormel convenience bacon, Hormel Cure 81 premium hams and Hormel Natural Choice deli meats. We also continued to see growth over our Hormel Country Crock refrigerated sides. Our Foodservice Group saw growth in its value-added product portfolio, including sales of Hormel Natural Choice deli meats and pizza toppings. Our Jennie-O Turkey Store segment completed a very strong year with a good quarter. Segment operating profits were up 4% and sales up 2% during the quarter. For the full year, segment operating profit was up 43% and sales increased 12%. Results at Jennie-O in the quarter were driven by the continued growth in value-added sales and efficiencies throughout their supply chain and in their operations. These more than made up for a significantly higher feed costs during the quarter. Sales increase for Jennie-O and all 3 value-added areas, retail, Foodservice and deli, led by Jennie-O Turkey Store retail tray pack and turkey burgers. Our second Make The Switch advertising campaign helped propel sales of these products. Our Specialty Foods segment got back on track with a segment profit increase of 12% and a sales increase of 10% in the quarter. Improved mix with higher sales of blended and nutritional products and better sales of canned meats were the primary drivers of the positive results during the quarter. Full year results for Specialty Foods had operating profit down 5% on 7% higher sales, as they were unable to fully address higher raw material costs until later in the year. Pricing taken in the third quarter helped offset those higher costs in the fourth quarter. Our international All Other segment capped off a very strong year with another good quarter, with segment operating profit of 3% and sales up 12%. Strong fresh pork exports drove the positive results. For the full year, segment operating profit was up 39% and sales were up 26%. As I stated at our Investor Day in June and subsequently, we expect to grow both sales and earnings in fiscal 2012. We are looking for our Refrigerated Foods and Jennie-O Turkey Store segments to hold their own, while our Grocery Products, Specialty Foods and international All Other segments will provide the earnings growth. We recognize that we will encounter difficult comparisons in the first half of fiscal 2012 becoming more favorable later in the year. Overall, headwinds to our outlook for 2012 include continued volatile raw material costs, higher grain costs and an anticipated decline in processing margins. We will continue to take strategic and modest price increases where we need them in order to partially offset these higher raw material costs. On the positive side, we continue to enjoy solid top line momentum with a number of our important value-added franchises. For example, the strong sales growth of our Jennie-O Turkey Store fresh tray packs and turkey burgers should continue into 2012, fueled by our Make The Switch ad campaign and the trend toward eating more nutritious products. The general wellness movement also lends strength to our Hormel Natural Choice deli meats. With the recent addition of the Wholly Guacamole line of refrigerated products, our Mexican foods portfolio is now well positioned to leverage its scale and our full range of product offerings in this fast-growing category. We look for strong contributions from our Hormel Pepperoni and Party Trays, as snacking occasions continue to be a big part of consumer eating occasions. The Hormel Compleats microwave meal line should benefit from the new packaging and advertising implemented this year. These are just a few of the platforms we believe will contribute to our growth in 2012. After taking into account all of these significant factors, we are setting our fiscal 2012 earnings guidance range at $1.79 to $1.89 per share. At this time, I will turn the call over to Jody Feragen to discuss the financial information relating to the fourth quarter and fiscal 2011.

Thank you, Jeff. Good morning, everyone. Net earnings for the fiscal 2011 fourth quarter totaled $117.3 million or $0.43 per share compared to $121.1 million or $0.45 per share a year ago. As Jeff stated, the fourth quarter of 2010 included an additional week. Net earnings for the 12 months of fiscal 2011 totaled $474.2 million or $1.74 per share compared to adjusted net earnings of $409 million or $1.51 per share a year ago. GAAP net earnings for the 12 months of fiscal 2010 were $395.6 million or $1.46 per share. A table reconciling our adjusted earnings calculations to earnings calculated under Generally Accepted Accounting Principles was included in our earnings release. Dollar sales for the fourth quarter totaled $2.1 billion compared to $2.06 billion last year, a 2% increase. For the full year, dollar sales were $7.9 billion, a 9% increase from last year. Volume for the fourth quarter was 1.2 billion pounds, down 7% from fiscal 2010. Year-to-date, volume was 4.8 billion pounds, up 1% from fiscal 2010. Selling, general and administrative expenses in the fourth quarter were 7.4% of sales compared to 8.1% last year. Year-to-date, selling, general and administrative expenses were 7.8% of sales compared to 8.4% last year. We expect selling, general and administrative expenses to be between 7.5% to 8% of sales for next year. Interest expense for the quarter was $3.3 million compared to $7 million last year. Year-to-date, interest expense was $22.7 million, down from $26.6 million last year as lower debt levels and lower interest rates reduced this expense. We expect interest expense to be approximately $12 million to $15 million for 2012. Our effective tax rate in the fourth quarter was 34.3% versus 34.8% in fiscal 2010. The year-to-date effective tax rate was 33.3% compared to 36% last year. For fiscal 2012, we expect the effective tax rate to be between 34.5% and 35.5%. The basic weighted average number of shares outstanding for the fourth quarter and full year were 265 million and 266 million shares respectively. The diluted weighted average number of shares outstanding for the fourth quarter and full year were 270 million and 272 million shares respectively. We repurchased 2.6 million shares of common stock during the fourth quarter, spending $72.3 million. For the full year, we spent $153 million, purchasing 5.5 million shares. We have 3.3 million shares remaining to be purchased from the current authorization in place. We announced a 9% -- a $0.09 per share increase to the annual dividend, making the new dividend $0.60 per share. This represents an 18% increase on top of a 22% increase last year, and marks the 46th consecutive year in which we've increased our dividend rate. Depreciation and amortization for the quarter was $31.2 million compared to $33.5 million last year. For the full year, depreciation and amortization was $124 million compared to $126 million last year. We expect depreciation and amortization to be approximately $115 million to $117 million in fiscal 2012. Total debt at the end of the quarter was $250 million compared to $350 million last year. The change was due to the issuance and repayment of notes earlier this year. We invested $61 million in our MegaMex Foods joint venture in the fourth quarter to facilitate the Wholly Guacamole refrigerated dips acquisition. Capital expenditures for the quarter totaled $41 million, up from $26 million last year. For the full year, capital expenditures and property acquisitions totaled $104 million compared to $90 million last year. For fiscal 2012, we expect capital expenditures to be approximately $140 million to $150 million. At this time, I will turn the call over to the operator for the question-and-answer portion of the call. Operator?

[Operator Instructions] Our first question is from the line of Akshay Jagdale with KeyBanc Capital Markets.

Just wanted to ask a question on the Jennie-O Turkey business. Was there -- can you -- was there any benefits from mark-to-market this quarter? And can you just help us frame your expectations for next year, given that it was a record year on sales and margins?

We saw no change in terms of mark-to-market, so that did not affect the results in Q4 at all. In terms of our expectations for next year, the team is doing a great job at overcoming steep cost increases that have been coming at them for several periods now, and will continue to into next year. They've done that in part with efficiency gains in the operation, and in part by pushing pricing in the various value-added segments. I think our advertising campaign for the Jennie-O Turkey Store brand has also helped support value-added sales growth, and we seem to have good momentum heading into next year for -- with those value-added products.

And just one follow-up. What kind of increase in grain costs are you expecting next year? I mean, where -- you had some hedging, good hedge positions this year, and there's been a lot of movement in grain cost. Can you help us understand just roughly, magnitude-wise what kind of increase you might be expecting there?

I guess, I'll probably let Kevin provide a follow-up to you maybe later in terms of any additional specificity. But clearly, we've said for the last several years that we're actively involved in hedge programs on our material grains for the major operations at Jennie-O. We've guided to between a 25% and 75% coverage range. We did say last year, for 2011, we were on the upper end of that range. Heading into 2012, we're kind of right in the middle of that range. But in terms of specific cost differences, we'll kind of have to do that on a follow-up basis.

And our next question is from the line of Christina McGlone with Deutsche Bank.

Jeff, I was just wondering where are you in terms of pricing through the raw materials? Are you pretty much caught up? Or is there more to go and then the kind of demand response you're seeing? And also if you could talk about the most points of pressure in terms of raw material costs.

Okay. In terms of pricing in general, I think our refrigerated operations had been in pretty good shape as had grocery. What has been a little bit unexpected is the level at which some of those raw material inputs have stayed this fall. And so the teams are continuing to assess whether they have the right pricing in the marketplace to fully cover down those costs, and that will continue to be a challenge for them as they head into the beginning part of next year. The Jennie-O Turkey Store team, I think, has done a good job of trying to stay ahead in terms of pricing against their cost input, so they still have a little bit more coming as well. In terms of demand reaction, this is the -- we kind of view this quarter when all said and done has been fairly flat in terms of volumes. Obviously, reported volumes are lower than that. But when you net out the comparison just roughly, we're looking at a kind of flat quarter. And that's the second quarter in a row when the volumes have been flat. These have both been quarters where we had to take significant pricing, and so holding the line in terms of those volumes has been important to us. Clearly, in the long run, we're looking to grow volumes of our value-added franchises. But as long as we continue to be in this kind of pricing environment, you'll -- we'll continue to see more larger net sales increases than you'll see volume increases.

And then just the pressure points in terms of raw materials, is it trim costs? Is it manufacturing fees? What are the things we should be watching?

Yes, and yes. You had 2 of them that have been certainly in our attention. Beef costs, certainly, have been a challenge for some of the value-added meal based items that utilize beef for both our Meat Products and Grocery Products groups. And then trim certainly is an important factor for SPAM, for our dry sausage items and those have been at elevated levels through the fall here.

Our next question is from the line of Christine McCracken with Cleveland Research.

Just on the rollout of Compleats, you talked about it being on the shelf now, but didn't see any -- it didn't appear to have a significant contribution in the quarter. I'm just curious if you're happy, thus far, with takeaway. I know it's early days, but maybe just an early read on that, and whether or not you've put any marketing dollars behind that.

Yes, I'm actually pretty happy with it. We had an up quarter, a clean-up quarter in the third quarter. For fourth quarter volumes were actually flat, but again, as you compare it, that was on a 13-week versus 14. So that was encouraging in terms of the volume signs. We have had an advertising effort against it, and indeed have now created a new ad campaign for the 3 major Hormel-featured items heading into 2012, so that will be Compleats, Natural Choice and Pepperoni. And then in addition, we unveiled a new label design at Investor Day in June, and have certainly been diligent at selling it into the retailers and getting into the market. And my observations are that on shelf, it's still maybe in about half the accounts. I mean, it takes a while to work through inventory. So we expect to have continued benefit as that new design and the new varieties are more readily available on shelf in 2012.

And then just in terms of price points, as a follow-up, historically, I think this is viewed almost as a premium product. Is it getting the takeaway in this economic environment that you'd expect? Or if things maybe improved a little bit, would you expect a little better velocity?

I guess, we view Compleats more as a mainstream product line as opposed to a premium product, but I guess that's in the eye of the beholder somewhat. We have experienced since the recession hit, a little bit of a downturn initially in the business and now more of a leveling off and starting to grow slowly again, so it does. I think single-serve convenience items certainly were something that seem to be impacted by the recession. And so if we all end up coming out of that, we do expect that to be a further tailwind in terms of being able to grow that item.

Your next question is from the line of Diane Geissler with CLSA. Diane Geissler - Credit Agricole Securities (USA) Inc., Research Division: I'm going to ask you a question about pricing within your Grocery Products segment. Because if I look at your results, if I make an adjustment and I appreciate I may be making some assumptions here that are incorrect, but if I make an adjustment for last year's quarter to exclude the extra week, and then compare it with what the number you posted this morning, it looks like your revenue within Grocery Products was up around 5.5%, which is not atypical with what you did in the third quarter when your revenue in the Grocery Products segment, which was up 4.5%. So is that kind of what you saw in Grocery Products? And then, I guess, if you could comment on what the mix is between pricing and volume within that segment.

Our read is similar to what you just described, Diane, in terms of how we're seeing those volumes. And then as we head into 2012, I mean, we do feel the grocery division has several solid initiatives that should allow it to continue to grow top line. It will be the 75th anniversary of SPAM. We'll have new advertising creative to help support that product line, and it has good momentum heading into the new year. But we do expect growth out of Compleats and then MegaMex, as we continue to add to that franchise, has had good experience in terms of growing our sales, and we expect to see that continuing going forward. Diane Geissler - Credit Agricole Securities (USA) Inc., Research Division: Okay. But, I guess, the question here is really you didn't begin pricing in Grocery Products until the third quarter, so certainly, I would expect your first and second quarter, you should see some pretty nice benefit year-on-year in terms of pricing before you overlap what you did last year. And then obviously, if prices -- input prices stay high, you may have incremental pricing that you take within Grocery Products. Is that what you're working on now?

Yes, that was, I guess, what I was referring to earlier was that we seem to be at component levels of certain of the raw materials, and we talked about beef and trim being a couple of them that are higher, quite a bit higher than historical rates, quite a bit higher than the normal seasonal trend. And so that's what we have to assess here is that are we just getting a kind of a hangover effect from pricing from the earlier part of the year, or is this establishing some sort of new norm for what these costs are going to be and, therefore, what we need to consider what our pricing should be accordingly. Diane Geissler - Credit Agricole Securities (USA) Inc., Research Division: Okay. And then as you've moved pricing into the retail environment, what has been the reaction from the retailers? Are they accepting of that? Because obviously, they're seeing it in every aisle. But some categories, I'm sure they're probably more accepting than others. If you could just comment on -- or even maybe the channel mix, what the reaction at the retail level has been.

Well, we have to work very closely with our retail partners in determining the appropriate price for the item. I mean, clearly, we are still dealing with pressured consumers. The key measure to us is takeaway ultimately. If our franchises continue to grow, or at least in the short run, if we see some flattening, but not declines, we're satisfied with that as long as we see the other end of it and start seeing the growth coming. When you look at a lot of our franchises over the course of the year, we have a lot of franchises, not just in Grocery Products, but in our -- in the grocery store period that experienced very solid growth. So overall, I think we have that credibility with the retail partner that we're measuring the right mix of advertising, promotion, shelf price, et cetera, to keep these items healthy and to make their consumers are reacting to them.

Our next question is from the line of Jeff Farmer with Jefferies & Company. Jeffrey D. Farmer - Jefferies & Company, Inc., Research Division: I think this is the fifth quarter in a row you've called out supply-chain efficiencies for the Jennie-O segment. So, I guess, my question is, how much runway do you have left going into FY '12?

I mean, each year, they're looking at aspects of their operation both on the farm side and in the plant operations, where they think they can continue to attain efficiencies. I think we've given you sort of a general guidance for next year that we're looking at somewhat of a flat year for Jennie-O Turkey Store. And when you compare that to the large increases in that results that you've seen for the last 2 years, that certainly does show that our expectations of being able to generate those kind of huge savings are probably less in 2012. But we do think the team will continue to be able to show, at least, something in that regard. Jeffrey D. Farmer - Jefferies & Company, Inc., Research Division: Okay. And then you might have touched on this, but you've seen 2 quarters of falling Jennie-O volumes even when you sort of adjust for the 13 week to a 13-week basis. What's your volume growth expectation for that segment heading into FY '12?

Well, Jennie-O is always a tricky read for volumes because you max -- you mix in the macro trends and what are our bird numbers and then what are the value-added volumes. We are saying for 2012, we're going to continue to run a tight operation, with feed costs being where they're at. We want to make sure we have the right amount of meat to support our value-added businesses, but not a lot more. And so total volumes for Jennie-O, you'll see next year, as we report each quarter, may well be down to flat to down somewhat. But we always -- we'll also let you know what the value-added trend has been. And as was mentioned on today's call, our value-added trend was still positive. We saw growth in retail, deli and Foodservice. And so our expectation for next year is that they'll continue to grow net sales on a value-added basis, probably on small volume increases there. But the total volume of Jennie-O Turkey Store in a given quarter may well be down based on those macro conditions.

Your next question is from the line of Lindsay Drucker Mann with Goldman Sachs.

I just was curious if you could comment on -- you mentioned that some of the upside you guys have had in Refrigerated Foods in Jennie-O's giving you a bit more flexibility to invest back in your Grocery Products brands, while some other food companies were struggling. Can you give us any measures whether it be market share trend? Or even just anecdotally what you're seeing in the marketplace that reflect kind of the fruits of this benefit?

Well, I mean, in many ways, the Jennie-O benefits of the efficiencies, we've frankly reinvested in Jennie-O. I mean, we've been able to support very significant advertising campaigns the last 2 falls in a row. Within the Hormel part of the portfolio, I mean, really, we really have done less of kind of trying to take it from refrigerated and invest in grocery, and more just looking at the Hormel brand as a whole and, of course, it does go over both segments. I know we had -- so the Compleats items or in other years, Hormel Chili would be items we support for the Hormel brand in the grocery division, and our Pepperoni and Natural Choice and in other years, refrigerated entrées or Hormel items within refrigerated. The overall Nielsen trends in our items, especially when we look at them over the course of the totality in 2011, are favorable. We're very pleased with the kind of growth we're seeing. As we've said before, I mean, our items are still, relatively speaking, low household-penetration items with relatively low-buy rates. And so we can create improvements such as what we've generated in 2011 with fairly incremental gains. And we're confident the team can continue to deliver those.

Okay, and then to clarify on your outlook for next year, you talked about Jennie-O and Refrigerated Foods essentially holding their own. Does that imply flattish profits year-over-year?

That's the range we're looking at.

So if we're talking about tough comps for the hog cutout, what does that imply in terms of your expectation for the balance of the Refrigerated Foods business?

Well, first of all, the cutouts will be a part of what we've also talked about in terms of timing of results for 2012. I mean, our first quarter last year, as everyone will recall, was a blowout quarter, highest quarter we've ever had, and one of the major contributors to that were the exceptionally high cutout margins enjoyed by Refrigerated Foods. We don't look for that to repeat here in 2012. Beyond that, I mean, it still does get back ultimately to growing those value-added franchises. And we think refrigerated, with both its retail aspect and its Foodservice aspect, should be able to steadily do that.

Okay. And then lastly just a quick clarification, you mentioned something about the pull forward of sales of whole birds for Thanksgiving. Can you just give a little more color on that?

Really, whole bird sales are highly dependent on what the customer wants in terms of when they take deliveries for frozen turkeys. Now fresh -- there's a small segment of the market that's fresh. Those are processed in our plant within 3 to 4 weeks of the Thanksgiving season, and those are not pulled forward. They're a very reliable sale during the month of November, but frozen sales can be delivered anytime from January, February of the prior year, all the way up until just prior to the holiday. And that, really, we do that in partnership with the retailer. They can take it either way they -- and this year, we just ended up having more wanting to take them earlier, and so we did reflect some of those sales earlier in the year in 2011. Too early to tell how 2012 will play out on a year-over-year basis. We started having those discussions with the retailer in about February or March of the ensuing year.

Your next question is from the line of Tim Ramey with D.A. Davidson & Company. Timothy S. Ramey - D.A. Davidson & Co., Research Division: If you're prone to worry, as I sometimes am, I think about the really great corn hedge position that Jody delivered last year early in the year. And then if we kind of think of you being 50% bought forward, we might have relatively high corn costs relative to cash early in the year. And I think that's what you're alluding to in your prepared remarks. Is there any risk that we see pricing pressure in the Jennie-O business in kind of the more commodity side of it as maybe people who operate on the cash market have more favorable cost position than your hedge position?

In the aggregate, our hedge positions for 2012 are perfectly favorable to the current cash market. It certainly won't provide the major benefit that our hedge positions provided in 2011, but we're not ahead of the cash market right now. Timothy S. Ramey - D.A. Davidson & Co., Research Division: Okay, so that's helpful. And then as I think about your CapEx budget, did you tell us what the big uptick was in CapEx for '12 versus '11? If so, I apologize I missed it.

I don't think we mentioned anything specific, Tim. But certainly, we've had 2 years before this, where we've been -- we were cautious at the beginning of 2010. And we didn't get our spending up to the levels we thought, and we worked hard on that in 2011. But it takes time to get some of these large projects going. So I have a significant amount of projects that have started in 2011 that will be completed and capitalized in 2012, plus a couple other good projects related to some exciting new products that we hope to introduce next year.

Your next question is from the line of Farha Aslam with Stephens Inc.

First, a question on Refrigerated Foods, Jeff, could you just provide some color on how your Foodservice sales are faring and price competition in packaged foods, packaged meats?

Sure, our Foodservice team, well, one of the measures we really study internally is how they're doing against their industry, and they just continue to generate solid results on that kind of a comparison. That being said, I mean, we started 2011 with some optimism, and things were -- there were some momentum building in terms of true volume gains early in the year, and then those kind of screeched to a halt in the total industry when gas prices started to go up in the spring, and so -- and it's been a choppy and tougher year since then. They ended up still showing some nice growth, especially of their higher-end items, the more highly value-added items, such as AUSTIN BLUES and Café H and Natural Choice, and those continue to be an area of emphasis for them. They continue to do an excellent job at not only serving the commercial trade within the restaurant world, but also a lot of the noncommercial vendors, and are growing their business there as well. In terms of price competition, it really is all over the board. It kind of depends on how differentiated the items are. Clearly, some of those market-based items within Refrigerated Foods, the bacons and the hams, those are price-competitive categories, but they have -- those prices have been going up a lot this year because the inputs are such a huge portion of the overall product cost, and everybody's facing those input pressures. But when you get into the more differentiated items, then you really -- frankly, you're pricing against the consumer. Thus, you need to make sure you're getting the right level to sustain your volumes against your following for that type of item, and it's less what the competition has had.

And a differentiated item would be your pepperoni?

Sure, party trays, the Compleats, those kind of items.

Okay. And then could you just provide some color on the M&A landscape and your priorities for cash? So far, you've been doing mostly small tack-on acquisitions. Anything in larger scale and is there a particular international market that you're focusing on?

Farha, obviously, we don't have anything to announce today, so our priorities continue to be the same as I discussed with a previous question on CapEx. We're looking to do some internal investment. And I think there's some excitement around some of the projects we have going in there. I believe we've stated that our priorities are to invest in our business and that's part of it, investing in CapEx, but also looking at acquisitions, and we'll announce those as they come. But we also have done a nice job of returning to our shareholders with our dividend increase this year and last year, coupled with our nice share repurchase this year.

And -- but any international markets or mostly domestic-focused?

I think we are looking globally for opportunities. And as Jeff has stated in previous presentations, it seems to make sense that the Asia-Pac area would have particular attractiveness to us.

Your next question is from the line of Robert Moskow with Crédit Suisse. Robert Moskow - Crédit Suisse AG, Research Division: I want to know if you had quantified where you think maybe just industry packing margins were a year ago in first quarter, and where you think they are today, so that we can get a better set sense of -- your first quarter is going to be a really tough comp in Refrigerated Foods, and we want to make sure we're setting it up the right way.

Well, if I look at just the spread between the USDA pork cutout and the Western Cornbelt for averages for what would be our first quarter, they were in the mid-to-low teens last year against the 5-year average that would be $5 to $8. Robert Moskow - Crédit Suisse AG, Research Division: Okay. Got it, okay. And then also, Jody, can you give us the number for CapEx spending this year? You kind of...

Yes, I just did, the $140 million to $150 million. Robert Moskow - Crédit Suisse AG, Research Division: Okay, so it's $140 million, so it will be up. And what about spending on MegaMex?

We haven't included any specific projects in there because that wouldn't show up in our capital expenditures. That just shows up as an investment in our MegaMex business. But I think there is some opportunity to make some further investments there, even with the franchises that we currently have. Robert Moskow - Crédit Suisse AG, Research Division: Okay, because I'm looking at your cash flow statement, it says $95 million increased investments, equity affiliates for 2010...

Right, that was the investment in Fresherized Foods that each partner put into the joint venture. Robert Moskow - Crédit Suisse AG, Research Division: Okay, then $51 million in fiscal '11...

It's '10. '10 was Don Miguel, and then '11 was...

Don Miguel, yes, and setting up for MegaMex venture. Robert Moskow - Crédit Suisse AG, Research Division: So fiscal '12, is it going to be similar to fiscal '11 around $51 million again? Or is it 0 or where do we think we are?

Well, the acquisition has been fully reflected now for Fresherized. So we have no new acquisitions to announce at this point, whether there could be other investments in the business to grow, and that certainly could happen, but it's unlikely at this stage to be at those kind of levels, absent a new acquisition.

Cash flow generation. Robert Moskow - Crédit Suisse AG, Research Division: If the acquisitions are in a different line in the cash flow statement, what I'm really wondering...

No, for investments that MegaMex make, it will show up in that investments line versus acquisitions because we are not the acquirer. It's the joint venture that's making an acquisition. You probably got to look at both lines, I guess. Robert Moskow - Crédit Suisse AG, Research Division: All right, I think I'm on the same page. So $51 million in fiscal '11 this year, fiscal '12, maybe down a little bit from there? Or right around there or it's unclear?

We don't budget for acquisitions. We just enjoy them as they happen.

Our next question is from the line of Ken Zaslow with BMO Capital Markets.

In your CapEx, can you break it down into what you consider cost-cutting measures kind of what -- I think, you would be doing the turkey business more versus growth initiatives. And can you define on what you think the return on invested capital would be outside of maintenance CapEx?

Boy, I can't do that in my head.

Yes, that's...

I'm just trying to figure out like you guys, obviously, delivered a good year, but I think the longer-term and figuring out what type of returns you had on some of this money going forward, and how you guys think about it beyond that? And again, I'm just trying to put some sort of stuck in the envelope type of math thing, whatever you can help me on in thinking about that will be great.

I guess, we -- I can probably provide you a little more of a narrative than what's the math. Clearly, in a business such as ours, we're always going to be spending money to support our plants to make sure they're state-of-the-art modern facilities. We do find ourselves in a position where we need to make investments periodically related to food safety, our employee safety that clearly will not have the financial returns that we would hold our other investments to. We sometimes have made additions to facilities in general. We did that to Dan's Prize. We did it to Jennie-O, and we did in Rochelle not too long ago. Clearly, we added the Dubuque [ph] plant not too long ago. And then Jody alluded to -- regardless of bricks and mortar, there are times that even within our current plant facilities, you end up having to make a fairly major expenditure just on a new and unique product line. In all of these latter examples I'm giving you though, we certainly would require our units to provide adequate cost of capital returns to our shareholders. And I think, over time, we've done a good job of doing that. So it's kind of a blend. This year's step-up in CapEx is really much more a product of what Jody mentioned, which is sort of a carryover just from a coincidental timing basis of a number of initiatives that got started in '11 rather than any one particular project that we can point to or a philosophy that's saying now, "Oh, we're not going to step-up to the 150 level on a regular basis." We've been kind of more at that 100 level, and that's probably more normal level for us.

But is there a way of the 140 to 150, is there at least a general breakdown of look, maintenance is going to be this, the cost savings initiatives are this and then the growth initiatives are this is 1/3, 1/3, 1/3? Just again, not exactly an exact number, but just some sort of guideline?

Let me have Kevin get back to you on that comment because I don't have that information in front of me to even give you these legs.

Okay. And then just a follow-up, which hopefully ties to this is, how much of the turkey infrastructure costs are you saving? I think, obviously, everybody's talking about the corn and the feed costs going up, but is there a way to think about on an ongoing basis, what -- how much should we continue to cut on a cost basis and read you here the operation there? And how long will it take you to get to that level?

In terms of specific targets for our teams, one of the commissions that we really not just ask Jennie-O but we ask all our teams to do, is to find efficiency gains within their facilities that offset as much of the plant-based inflation as possible. So obviously, wages tend to go up, benefit costs tend to go up, but our teams have been a very good job of making sure that our total operating cost are not going up at that level. But in terms of getting more specific to that, on Jennie-O, I'd have a hard time doing that right now.

Okay. Are you close to -- because it seems like you've done more than just offset the costs. I mean, to me, it seems like you're actually doing -- on complicating the dynamics of these, of how it works and it seems like this is a ongoing process that can take 1, 2 or 3 more years or are you there? Just trying to get some sort of flavor for -- it just seems like you're doing a good effort. I'm actually trying to ask somewhat of a positive question. I'm just...

Okay, sure. No, I understand. I guess, similar answer to what I made -- said earlier about, I think, you can maybe gain something out of our guidance for Jennie-O for this year that we do think there's perhaps a little bit of a slowdown in the opportunities on the cost side to keep making those large gains that we are able to do over the last couple of years, doesn't mean we're not going to still find other incremental opportunities. In the long run though, Jennie-O, the Jennie-O story will be driven by value-added sales. It will be -- it's still a protein that is quite underutilized that on an aggregate-protein basis has been flat for 20 years. But clearly, if you look at our growth, we found value-added niche items that are connecting with consumers. But they're still at very low household penetration rate levels. Our ad campaign seems to be increasing those and in the long run, that's what's going to be the driver for Jennie-O for years to come.

Your next question is from the line of Jon Feeney with Janney Capital Markets.

I wanted to ask about on the turkey supply chain, it strikes me that, historically, when you look over the sweep of history, the business has averaged 8%, 8.5% type operating margins up and down. Part of what's caused significantly better results over the past 12 and 18 months has been certainly brilliant hedging and some very good market conditions and an unusual amount of discipline in turkey supply. But then part of it is stuff that only you can control, which are taking out the permanent supply chain and costs, and it seems like mixing the business to better margins. So I guess what I'm trying to understand how much has that midpoint average, whatnot, margin for Jennie-O improved? Like is this is now an average 10%, 10.5% margin? Is it higher than that? I'm talking over the next 5 years, what do you think is -- how much has that margin improved specifically?

I guess, I'd be hard-pressed giving you an exact number to it, though I definitely would agree with the conception that we've hopefully moved that average up. And the other thing we really tried to do by keeping our supplies as tight as we have is to narrow the range of possible outcomes. I mean, in some of these years with higher commodity markets, I mean, we frankly probably could make even more money in those years by having surplus commodity meat. But we've seen the opposite effect of it in the years, where they're plus favorable. And overall, we want to keep our team focused that you're raising turkeys to create value-added food items, and so that's still the game plan for 2012. We're keeping it tight based on the high grain inputs that we're seeing going forward. And the general industry in turkey seems to have maintained a decent discipline. But obviously, we're just one player in that, and others have to make their own decisions, but -- so overall, I do feel we've moved the average up. I guess, at this time, I don't have a new specific number to give you, but -- and hopefully, we've tightened that range.

Why is the turkey industry showing so much discipline?

Again, it's one player at a time. It's an industry, the dynamic. There's 3 kind of larger players, and then there are a lot of other players in various parts of the segment, some more vertically oriented, some more based on the value-added items. So I can't tell you in general as to what the specific answer as to why it seems to, for example, be a little bit differently than, say, the chicken industry has. The products are different. I mean, in terms of how they behave in the marketplace, absent Thanksgiving, turkey is not a footballed item. It's not the hot feature in the grocery store. It's the Steady Eddie performer that has a certain niche following that like the items. And so we're not -- we're never going to be the lead item in the ad, but it has a good stable following. And maybe that supports the outlook of how the different players will get their supply sides. I don't know for everyone else.

Right. And just a detailed question for Jody. I know the K's not out yet, but the -- what -- can you tell us what role inventory valuation played in the quarter? I know it played a role last quarter.

Yes, and that was part of what impacted our general corporate expense if you look at it on a segment level. Traditionally, you think about that inventory reserve moving, increasing when pork operating margins are higher, decreases as pork operating margins decline. So we had less of a reserve this quarter and last quarter because pork operating margins were declining vis-à-vis the prior year.

Okay, so you have less of a reserve this quarter sequentially from the third quarter as well?

Right, not -- it's probably more flat to the third quarter, but both versus the prior year, yes.

Your next question is from the line of Ann Gurkin with Davenport & Company. Ann H. Gurkin - Davenport & Company, LLC, Research Division: Just wondering if you'd comment on consumer purchase patterns or behavior during the quarter and what you're seeing as you go into calendar '12 for like consumer purchases behavior, what Hormel needs to do to address those patterns.

Ann, from our perspective, they've remained fairly favorable. I mean, our 3 major areas in terms of the consumer items within our total portfolio would be Grocery Products, the Meat Products, part of Refrigerated and Jennie-O Turkey Store. And when I look at their focus items, we have a lot more items that are gaining share and are gaining volume than we have that are flat or declining. So again, I think our team has a pretty good recipe right now for where they're putting their pricing, where they're doing their promoting and what the advertising support that we're giving the items. The advertising focus for the past year was clearly on both the Hormel brand and Jennie-O Turkey Store. For 2012, we'll be adding a campaign that involves SPAM luncheon meat as well, and so we think Grocery Products will benefit from that. And then the MegaMex group also has advertised their major brands, and those continue to gain slottings in the stores. Ann H. Gurkin - Davenport & Company, LLC, Research Division: Okay, and then within Grocery Products, can you get to the -- or can you stay at this mid-teens to high-teens margin range for fiscal '12?

We've talked before. The caveat I have to give you, Ann, is we're still kind of sorting through how we're going to handle in the long run these items that we're adding to the MegaMex portfolio. So, for example, thus far, Don Miguel and Fresherized show up on the equity and earnings line, but the sales are not in our sales numbers. That's different than the rest of MegaMex. As we integrate those items in, we may have to reassess that. And so if they do get integrated in on a percentage basis, that would lower our targets in terms of what grocery would deliver. If everything stayed the same, we would expect to sort of incrementally improve our results of Grocery Products from the level they were at in 2011, but it may not all stay the same.

Your next question is from the line of Eric Larson with Ticonderoga Securities.

There's been a lot of discussion on pricing this morning, and I know it's a very uncomfortable place for everybody to go. And this is just a very general question, maybe it's more specifically can be answered for the Grocery Products area. But when you look at your pricing strategies or maybe you can maybe just give me what your pricing results have been, do you try to protect your dollar profits? Or do you try to protect your percentage margin?

I guess of the 2, we tend to focus a little bit more on the dollar side. But again, it really does vary by the different categories. I mean, the retail consumer items are the ones that tend to move more slowly that you have to give a certain notice to the retailer that we really want to observe what you have -- on the plus side, you have better data, you have the Nielsen data and so forth to really show you what the sales trends are. At the other end of the spectrum are the items that are much more market-based, whole turkeys, hams, bacon, et cetera. Those move quickly. There, again, you're just -- you're kind of trying to preserve, I would say, your dollar margin as best you can against what the cost inputs are. And then within the foodservice trade, it's much more customer-specific. Some are on matrixes. Some of them have certain notice requirements. But again, they're moving periodically to try to preserve a certain target margin range.

Okay. That's fair. So with that as a comment, I mean, you could see more movement in your gross profit margin percentage-wise than -- and that would be a typical -- that would be something typically that we should we expect as analysts.

Well, it's probably an item that we hone in on maybe a little less. I mean, you know what you're trying to ultimately bring home in dollars. You see what kind of pressures you're under in terms of costs and what that does to price, and the rest falls out in between there.

Okay. That's fair. Then just the last follow-up question is I continue to see a lot of your advertising for Jennie-O in your -- in those turkey burger, those campaigns that you have going out, where you stop in a certain city, and you feed everybody turkey burgers and show them the quality and the taste profile of those products. And it seems to me that, that would have -- should have very positive impacts on your volume growth on your prepared turkey burger business. Do you have any results that you can share with us on that? I mean, what -- I think you did a little bit in the last quarter. I think you had very strong volume growth in Q3. And I think you mentioned that, specifically, is one of the factors. Is that continuing?

We really -- we've been able to do this Make The Switch campaign starting in Q3, Q4 of last year, and then it was off air for a while, and then it is back on again in Q3, Q4 this year. We've seen sustained volume trends on both turkey burgers and fresh tray pack that have been in the burgers' case, solid double-digit and fresh tray pack ranging from high single digit to low double digit. So we're very pleased with that. It seems to also have this kind of spillover effect we're looking to have on our other branded items that the whole concept of making the switch for health reasons to turkey isn't limited to burgers. We think that's a good carrier item. But clearly -- and then, I think -- frankly, I think the team did a really wonderful job of branding the spot. I think I might have mentioned at past conferences that our early efforts to really steer people on a healthful basis towards Jennie-O, I think, were good in terms of their message, but they weren't necessarily strongly associated with the Jennie-O Turkey Store brand. These new ads do a much better job of driving the brand as we've shown much enhanced awareness numbers for the brand.

Our next question is a follow-up from the line from Akshay Jagdale with KeyBanc Capital Markets.

I just want -- this one's probably for Jody. Just in terms of divisional EBIT, what are your expectations for growth there? And if you could comment on the growth by division, that will be great too. I know you mentioned that Jennie-O Turkey, you expect flat growth or flat profits next year. But any color there would be very helpful because there's a lot of moving parts below the line.

Right, and Akshay, you're asking for directions that I don't have to give you, and I would suggest you follow up with Kevin.

Operator, I think that's it for the questions. At this time, I'd like to thank everybody for listening in and the analysts for the good questions, and we wish everybody a happy Thanksgiving. If Tim Ramey is still in the line, he may have a line recommendation to pair with turkey. He's probably not on the line any longer. Happy Thanksgiving, everyone. Thank you.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.