Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Hormel Foods First Quarter 2020 Earnings Release Conference Call. At this time, all participants are in a listen-only mode. As a reminder, this conference is being recorded, Thursday, February 20, 2020. I would like to turn the conference over to Nathan Annis, Director of Investor Relations. Please go ahead, Mr. Annis.

Good morning. Welcome to the Hormel Foods conference call for the first quarter of fiscal 2020. We released our results this morning before the market opened around 6:30 a.m. Eastern. If you did not receive a copy of the release, you can find it on our website at hormelfoods.com under the 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 an overview of the Sadler's Smokehouse acquisition, a review of each segment's performance for the quarter and our outlook for the remainder of 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 other analysts, please limit yourself to one question with one follow-up. If you have additional questions, you are welcome to get back into the queue. An audio replay of this call will be available beginning at 11:00 a.m. today, Central Standard Time. The dial-in number is (888) 204-4368, and the access code is 4720526. It will also be posted to our website and archived for one year. Before we get started, I need to reference the safe harbor statement. Some of the comments made today will be forward-looking, and actual results may differ materially from those expressed in or implied by the statements we will be making. Please refer to Pages 7 to 9 and 28 in the company's Form 10-K for the year ended October 27, 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. At our Investor Day last October, we outlined our 2020 path forward, which included growing our deli and foodservice brands as a top priority. This morning's announcement of an agreement to acquire Sadler's Smokehouse is another step forward on this initiative. Sadler's Smokehouse, based in Henderson, Texas, has been making authentic pit-smoked barbecue products since 1948. Hormel has been fortunate to have the Sadler organization as a key supplier for over two decades. When the Sadler family decided it was time to sell the business, a new Hormel Foods was the company to call. Over the past few months, we have been working on finalizing this deal. And I am personally excited to welcome their brand, products and team members to the Hormel Foods family. Authentic barbecue remains on trend in the U.S. The number of many mentions has increased at a strong pace over the past 10 years. And today, barbecue extends well beyond the traditional barbecue restaurant format. With Sadler's as the key supplier, we have been able to capture this favorable trend through our Austin Blues barbecue brand. Austin Blues is a line of genuine slow-smoked beef, pork and chicken products for the foodservice and deli channels. As one of our premium Preprinter protein brands, Austin Blues has seen great success in growth. We are doing the difficult work of preparing the product so the operator doesn't have to. However, they still get the flexibility to customize the product with their own signature sauce. We see similarities between this acquisition and the acquisitions of the Burke Corporation in 2008 and Fontanini Italian Meats and Sausages in 2017. Both Burke and Fontanini have been very successful contributors to our foodservice growth, and each has required capacity expansions to keep up with the…

Thanks, Jim. Good morning. Net sales for the quarter were $2.4 billion, up 1%. Organic net sales were up 4%, with three to four segments showing growth. Pretax earnings were $290 million, down 5%. The decline was driven primarily by the sale of CytoSport. The effective tax rate was 16.3% compared to 21.3% last year. The rate was impacted by the large volume of stock option exercises in the quarter. This is a timing issue and does not impact our expected full year tax rate, which remains between 20.5% and 22.5%. Earnings per share for the quarter was $0.45, I said about last year and in line with our expectations. For the quarter, SG&A, excluding advertising, was 6.7% of sales compared to 7.1%, excluding the $0.02 legal settlement benefit in 2019. Net unallocated expense for the quarter decreased by $9.7 million. Last year, we incurred expenses associated with the Fremont sale. We expect net unallocated expense to be between $40 million and $60 million for the year. Advertising investments for the quarter were $35 million, up from $34 excluding CytoSport. Operating margins were 11.8% compared to 13% last year. Lower gross margins for Grocery Products was the primary driver. We generated cash from operations of $1 88 million during the quarter, a 1% increase. We paid our 366th consecutive quarterly dividend effective February 18 at an annual rate of $0.93 per share, an 11% increase over 2019. Capital expenditures were $58 million. We expect capital expenditures for the year to be approximately $360 million. Large capital projects include the Burke facility expansion, which will be completed in the summer; a new Columbus dry sausage facility; and Project Orion. Working capital increased as we continue to build inventory in anticipation of the upcoming relocation of the value-added production lines from Fremont…

Thank you. [Operator Instructions] And now we'll take our first question from Benjamin Theurer from Barclays. Thank you. Your line is open.

Hey, good morning, guys. Okay, perfect. Thank you. Good morning Jim and Jim. So one question on the acquisition you've announced. Because clearly, you've laid out how this is going to fit in and what the financials are. Now you've also said you're going to immediately invest in the operation. Is that something we should consider from a CapEx point of view? Is that going to be meaningful with up to the $360 million you've announced prior? And where do you think you have most of the potential, within foodservice or actually taking those products into retail, as you've mentioned in your prepared remarks? And then I have one quick follow-up.

Good morning, Ben. I mean, there's a couple of areas. I mean, as we go through facilities in the acquisition process, we usually find some opportunities to upgrade facilities. That's the case here. Also perhaps some needed maintenance, that's not unusual. And as we look at our overall budget of the $360 million, we're holding that number the same because we have projects that ebb and flow throughout the year. So we don't really see the need to modify that number at this point. In terms of the opportunity, in the short term, this is definitely going to have a bigger impact in our – in the foodservice space. And I think as we move further down the line, that's when we see the opportunity to really build out a bigger retail presence and expand it into the deli. And of course, it aligns well strategically with all those areas, and over the last several years, we've talked about at various times, different strategies we have in place to expand all of those businesses. It stays on track with our foodservice strategy. From a deli perspective, we've talked a lot about how retailers are looking to expand and improve their prepared food offerings. This will be a great opportunity for us to do that. We already have a presence in the retail space with Lloyd's barbecue, but we think this will be an opportunity for us to really improve the product offerings that we have. So as you go around the different businesses, there's a lot of boxes that it checks in a very positive way.

Perfect. And then just one follow-up on ASF. I mean, clearly, we've been in a situation where prices, for example, in your international operations, be it in Brazil, China have been significantly impacted already. In the U.S., it's more of a volatility thing. What measures have you taken to kind of produce over that volatility? Is there anything you can do in terms of medium long-term contracts to kind of lock in some sort of pricing and then ultimately take the pricing action you need to do on the shelf to offset maybe that higher input costs on a year-over-year basis. Anything you've been doing on that hedging strategy.

Surely Ben. Thanks for the question. We have taken hedge positions. And in fact, we talked a little bit about the fact with the unusual market conditions that we experienced in this quarter. As hog prices were down, the spot market was down as the primals turkey value was going up. I mean, that's a very unusual market condition. In fact, it's only happened in three quarters over the last 21 quarters, where that market condition has existed. Some of those future contracts did were negative to the P&L in the first quarter. But we are taking future contracts. We feel that our various approach with multiple formula pricing for our acquisition of hogs is a sound approach to the volatility that exists.

And Ben, I would add, I mean, clearly, there's a level of uncertainty in the marketplace now that you got the impact of the coronavirus in China and the impact that's having on export markets in terms of reports of exports backing up and the idea of what happens to the hog supply here in the short term. SO there's still a lot of uncertainty because of ASF, because of the coronavirus. And as you would expect, we're watching all of the fundamentals very closely. And if we get to the point where we have to take – have to take pricing, as we demonstrated last year, we're willing to do that.

Okay. Perfect. Thank you very much.

Thank you. And now we'll take our next question from Mr. Tom Palmer from JPMorgan. Please go ahead. Your line is open.

Good morning and thanks for the question. I first wanted to clarify your segment guidance. I think you previously expected organic EBIT, so excluding CytoSport, to be up in all four of your segments. If I interpreted the release correctly, I think you're still looking for Refrigerated and Jennie-O to be up year-over-year. It sounded like International down. And then I wasn't sure on the Grocery side. So I guess, one, is that correct? And then two, what is the grocery outlook for the year?

Yes. Thomas, your assessment is correct. So Refrigerated Foods and Jennie-O, up. Uncertainty, obviously, in the International segment, given what's happening in the marketplace. And then we did call out, in our fourth quarter call, the fact that net of CytoSport, GP would be up. And so we are still holding to those numbers in that comment.

Okay. Thank you. And just to follow-up on the grocery side. You did call out the headwinds from rising trim. And it sounds like that's come in a bit, but would you elect to take any pricing? Are we going to see any flow-through here as we look towards the second quarter of pricing on products that are exposed to trim? Or did it roll over fast enough that it was not needed?

That's exactly right. I mean, the – although the price in the markets ramp up, they didn't hold long enough for us to take any pricing activity. So we didn't take any in the first quarter. We don't have anything on the radar right now for the second quarter. And the point that you made in terms of it impacting the quarter is exactly right. We saw that in our chili business. And of course, as we changed our strategy, he had kind of a double effect of the rising market and then we made an intentional decision to change the strategy and how we went to market. So no pricing and really nothing on the radar.

Okay. Thank you.

And now we'll take our next question from Peter Galbo from Bank of America. Please go ahead. Your line is open.

Hey guys. Good morning and thanks for taking the question. Jim, I just want to get your kind of higher level thoughts on the announcement yesterday that you guys had been reading to racked up to be the free pork and just – should we read into that at all as maybe commodity is going to start making up a greater portion of the business, again, because it just provides more export opportunities? Or just how should we think about that at a high level?

I mean, at high level, this isn't new news to the industry. You've seen some other big players already make that move. We've had it on our radar for some time. Do we think that it makes sense all of a sudden, a huge export, a bigger export player, it won't be huge? But we do think there will be some opportunities. The other thing to consider that our ability to really make this shift is tied to the sale of the Fremont plant, our relationship with WholeStone who has a vertically integrated supply chain. And so we're given that opportunity.

Got it. Okay. That's helpful. And maybe just switching to Jennie-O. Obviously, the distribution gains are positive and volumes are moving in the right direction. But pricing, at least for the industry, is still challenged. And Jim Sheehan, I think you gave some statistics around cold storage and cold placements, but breast meats in turkey in particularly remain pretty weak. Just any thoughts there? And what's it really going to take to get back to kind of accelerate?

Yes. I mean, I think it's really – it's more of a seasonal issue, seasonally lower. I think the market conditions are the fundamentals that we're describing are positive to the business. And so it's nice to have the market fundamentals positive. In addition to the positive work being done in the business, really, the things that we can control as we talk about delivering excellent results across the supply chain, live production, manufacturing, the improvements in lean ground turkey sales and continuing to gain back that distribution. So in my prepared remarks, Peter, I really talked about the momentum that we're seeing in the business. And for us, that's really the key takeaway is that it has trended down, and it's been a difficult business.

Great, thank very much.

Yes.

Thank you. And now we take our next question from Heather Jones from Heather Jones Research. Please go ahead, your line in now open.

Thank you for the questions. Good morning.

Good morning.

I wonder if you could talk about China a little bit. So you mentioned that the majority of your sale – of your employees are still not back at work due to quarantines and transportation issues. But I was wondering if you could give us a closer look at like what have you seen over the last week or so, has there been any improvement in that cadence of sales? Or does it seem like the country is still largely as it was a week or so ago.

Yes. All of our reports, Heather, are that is as it was a week ago and probably even slightly before that. What we were describing is – the largest portion of our sales in China are foodservice sales. And you've seen multiple reports, and we're no different, that the foodservice industry has essentially come to a halt in China. And so not only are we having the demand side in foodservice. Where there are opportunities, we're seeing some retail shelf-stable items. We talked about SPAM and SKIPPY Peanut Butter, the supply side and getting the plant to produce those products get that up and running, has been an issue as well. So we – you've got it on both sides of the supply and demand equation. Again, as we said, we understand where we are today. The problem is really forecasting when do we see it start to change. And if it changes in the back half of the year and you get a pipeline fill, well, that can change c the business in a hurry. But it's really too early to call. Back to your original question, we haven't seen anything noticeably different here in the last week or two.

And as a follow-up to that, so I read some things that were talking about restaurants like selling their inventory and all because they're not open and they're – they need to sell it or lease it. So you talked about the second half, potentially having a pipeline. So I mean, is it correct to think that you would have not only the pipeline still at the retail level, but a pipeline fill at foodservice? I mean, is that a – does that make sense to think of it that way?

Yes. I think when we're talking about the pipeline sales, I mean, we are thinking more of it from probably a foodservice perspective, since that is the bigger part of our business. If you've got people who are emerging from this quarantine that's locked down, one of the things that they probably will want to do in resuming their normal day-to-day life is going back to eating out. So yes, I think that's a good way to think about it. It's just the uncertainty around timing.

Okay, perfect. Thank you so much.

And now we will take our next question from Ben Bienvenu from Stephens. Please go ahead, your line is open.

Thanks good morning.

Good morning Ben.

Want to ask on the inventory side. For the last several quarters, you guys have leaned in to inventory a little bit and bought in advance of what you needed in light of opportunistic deflation in some of the primals that you typically buy buy. With bellies having been depressed as of late, what kind of opportunity does that give you? And when we look at the elevated, still elevated inventory in this quarter, can you just help us think about where your inventory sits today versus the comments you might have made a quarter ago? And to the extent you can talk across the primals, that would be helpful.

Certainly Ben. First of all we have been building inventory because of the transfer of production from Fremont into other facilities. So part of that has been just a safety stock, if you will, to make sure that if there's any slowdown in the start-up of those lines, we have plenty of inventory. But you're right, we have been building inventory in anticipation of higher ASF costs. In some cases, it's mitigated the cost like for trim for SPAM. In other cases, it's actually hurting the decrease of the belly prices. The belly prices that closed at $1.40 at the end of the first quarter are now down to $90. I mean, a $48 drop in those belly prices is not expected at this time frame. So we'll continue to make decisions and determine case-by-case as to what we're seeing in the marketplace. This volatility that we're seeing is making it harder to tighten the market. About the time that you think that you've – this is the time to build inventory on belly or bacon, for instance, you see this kind of drop in bellies. And it's a difficult task, but we're staying on top of it and trying to use our best knowledge as to what to build and when to build it.

Okay, great. And then asking a follow-up on Sadler's. It seems like a nice fit in your portfolio. How representative would this deal be of the types of additional deals that you would like to do, given the additional balance sheet capacity that you have? And then how representative would it be from a purchase price perspective and/or valuation of what the landscape looks like and with the pipeline of deals that you would be looking at?

Yes, that’s a tough one, Ben. Because, I mean, we evaluate these deals, the pipeline on a deal-by-deal basis. We've talked about our ability to do a bigger deal, and that remains. And are we willing to do a bigger deal? Absolutely. But it's got to be the right deal. And we've got to have it come to market, and you've got to be able to get it to the finish line. line. We like deals like the Sadler's deal, just like we like the Burke, like we like to Fontanini deal. The beauty of those deals is it really is a one-on-one negotiation. The relationships that we've built over time, they've been a supplier for over 20 years. So you really know the people, you know the business, they know us. So is it representative of the deals we like to do? Absolutely. And we can put it into a very strategic part of our business in foodservice. And so we're we like to do a bigger deal? Sure. Could we do a bigger deal? Absolutely. But if we have deals like Sadler's, Fontanini and Burke that come along on a regular basis, we'll take them all day, every day.

The item that I would add on this, Ben, is that it's not only the quality of the deal. But when you look at the purchase price, net of the tax benefit, you're talking about a deal that was done at an EBITDA multiple of about nine. And once we get through purchase accounting, we see this as a $0.02 to $0.04 per share accretive to the business. So it's not only a great strategic fit, but we were able to get this at a reasonable price.

All right, great. Thanks for the comments. And good for the rest of the year.

Thank you.

Thank you. And now we'll take our next question from Ken Zaslow from Bank of Montreal. Your line is open.

Hey good morning everyone. Just an overarching question first is, it seems like the commodity environment, though volatile, is lower than you would have expected. Does that mean that you will get the timing benefit later in the year, and generally, you should be in a tailwind? It just seems like if I go back to your original expectations across the board, you're in better shape than you started. Is that not a fair question, it was just a timing issue?

Well, we've talked about this before. When you're seeing this kind of volatility, it's going to move profitability between quarters. Even since the end of the first quarter quarter, you've seen the carcass value dropped $12 while hogs have only dropped $3. So we're getting into a more favorable market condition than we certainly had in the first quarter. Again, this was a very unusual market condition, especially with the structure in which we buy the majority of our raw materials, also basically the carcass value. We We didn't see the benefit of the lower spot market because we do not buy a majority of our raw materials that way. But still, we are profitable in the pork operating area. I think our structure is sound, we have built the inventories. We're trying to take advantage of our market. So we believe that we're in good shape going into the rest of the year.

I just would have thought you would have been a little bit more positive given the environment. But my second question is on grocery. Can you talk about – the profit came in lower than we would have expected? Can you talk about – are there trends within it? Is it the peanut butter side? What is really preventing this to regain its margin structure?

So Ken I’ll just kind of tap on to the first question you asked today. And I think Jim gave a great answer to how we're thinking about it, your comment around you would have been more optimistic. I think the kicker in all of this is just that volatility that we saw in Q1 and how does that play out for the balance of the year. So we're in a good position, but we really can't predict that volatility. Let's prod into Let's prod into the GP question. There's a lot of moving parts, as you can appreciate, and obviously, SPAM's off to a great start. As the trend continues, it will be our sixth consecutive record year of sales. We did make this shift in Chili, where we've moved some of the promotional activity into advertising to really support the brand, talk to consumers and we believe it's going to be a longer-term benefit for us and the retailers. So that's a work in process. MegaMex continues to perform well. You mentioned SKIPPY. And yes, SKIPPY is having a dramatic impact on the profitability of grocery products, and it's all tied back to the deflationary price action that was taken. And so that is still a work in process. I mean, our team is focused on customer by customer revenue growth management, making sure that we're effectively spending those trade dollars and having advertising to support the brand, continuous innovation. And then as we saw in the first quarter, we've got input costs. That volatility that can create noise late in the year. But with all those moving pieces in GP. I mean the fact is we have work to do, right? We've got work to do to make sure that we keep SKIPPY on track. We have work to do to make sure that we execute this shift in the chili strategy. When we do that, mean, we'll achieve the results that I talked about in the fourth quarter, which was an increase year-over-year net of CytoSport. So I mean, like I said, there's a lot of moving parts. But we know we have work to do do, but the business still has a lot of favorable parts to think about.

Great. I appreciate it. Thank you guys.

Now we take our next question from Robert Moskow from Credit Suisse. Please go ahead your line is open.

Hi there.

Hi Rob.

I guess I’m little confused as to how your – how did the next few quarters shape up significantly well enough to offset what, I think, was an operating profit miss in the first quarter. I don't see how Chili makes up for the – there's not going to be another Superbowl for the rest of the year. It sounds like SKIPPY – it sounds like you're saying that even though you're laughing last year's price increase, peanut butter will still be down in terms of profitability for the rest of the year. In Refrigerated, are you saying that just the commodity environment is just much more favorable now. You have better visibility in it. First quarter was just – it looked good for a while and then it didn't shape up the way you thought it would, but now it does. So is Refrigerated really carrying the day for the next few quarters?

Hi Robert, I think, going back to your opening comment, I mean, in total, our pretax earnings met our expectations for the first quarter. GP clearly did not meet our expectations. Refrigerated did, job succeeded. International was slightly below what we thought. But as we think about the rest of the year, we do think –I get what you're saying about the Super Bowl, but the idea of making sure that, that business is not entirely focused at one part of the year, we know that consumers are using Chili throughout the year. We need to make sure that we're reminding them we're increasing that velocity and that frequency. So we do believe that that's an opportunity, and that's why we shifted the strategy. But Refrigerated Foods is going to be a critical piece for the balance of the year. Jennie-O Turkey Store remains a critical piece for the balance of the year. And we have nice momentum there. We got to do what we said we would do in GP for the balance of the year to get the results that I've talked about. And then really the wildcard, the uncertainty is International. And what happens, when does it happens, a lot of timing issues. So I mean as we think about the rest of the year, we actually – we feel good about the business, the fundamentals in Refrigerated, the momentum in Jennie-O Turkey Store. Jim, I don't know if there's anything you would add.

No, I mean you are right Rob that the market conditions have turned drastically in Refrigerated Foods. As you've seen, the cutout dropped $12, the spot market on hogs has only dropped $3. The market conditions that are unfavorable to the pure packer are favorable to us. And I think that's important. The important issue as we go into the future quarters. Really this is the market that we're structured for.

Okay. All right. Got it now. And in fresh pork, did you say that it was profitable in the quarter? Was that the commentary?

Yes.

Okay. Can you give us a rough estimate how much or just profitable is fine?

It was profitable and even in the market conditions that we are faced with, it was a very nice performance by the the pork operating group.

Okay. All right. Well if you need maybe Chili during the summer, I do that. So I'm happy to help. So thank you.

Chili and chilidogs, so get them both, Rob.

You got it half right there. Thanks.

Thank you. And we will go the the next question from Michael Lavery from Piper Sandler.

Good morning. Thank you.

Good morning.

When you look at the International segment, you've had such strong volume and sales growth, but obviously EBIT was down significantly. Can you just give a sense of how much that's a proxy for how a broader ASF outlook may – impact might look? And how would you compare and contrast what you expect in the business more broadly?

Yes, I think it's in line with what ASF impact would be. We saw a run up in raw material costs and we took corresponding pricing actions, which are always tough to get through as quickly as you'd like. And so we saw that in our business in China. We've been seeing that in the business in Brazil as product has been exported out and markets have moved up there as well. So I mean I think Q1 is probably a good proxy for what we would expect. I mean, the key is going to be that we take pricing and we all know that it takes time to get that pricing. And the pricing that we did take in China on retail and foodservice, as it has flowed through, up until the coronavirus, we didn't see a significant drop off in volumes.

So I just want to make sure I understand your answer. So in the quarter you are reporting there's less coronavirus impact or very little. And it's just that the pricing hadn't come in, in the timing that covers the input cost pressure, so it's kind of that front end of the lag. Is not the right way to think about it?

That's exactly the way to think about it.

Well, I guess, so what's next? I mean, this is obviously a pretty steep decline. How quickly does that rebound? And maybe in the hypothetical ex coronavirus view anyway, what would you expect? And maybe more importantly tying it to your Refrigerated Foods segment, how should we think about the parallels if you see that cost pressure flowing back here more broadly, would a 20% EBIT decline be the right expectation for that first quarter before the pricing really gets in place?

I don't know that you're – I don't know if you want to think about a direct correlation. I mean, you've had a lot of moving parts in China and there's still a lot of unanswered questions in terms of what's happening with their supply, their herd in China. I wouldn't use it as a direct proxy for the U.S. at all. As we think about what we're seeing domestically with pork production. Our pork production is expected to be up 4.5%, which essentially offsets the exports which are covering down ASF implications, right? They're going to be up 15% for 2020. So I don't know – I won't keep that isolated to China. I wouldn't carry that over to the U.S.

No, this is isolated to China. As Jim said we're watching the fundamentals very closely. The increase in supplies and balance with the amount of exports that was expected, now I will point out that that level of export was really, earlier, we don't know what it will look like based on the conditions in China. There's record cold storage levels and so we think the fundamentals are solid domestically for the pork industry and are improving significantly for the turkey industry.

And just a follow-up then, if you look at your description about the favorable conditions for Refrigerated Foods now, but the profit growth there is up, but pretty modest. How much acceleration should we expect? Is it going to be more likely to be more similar to this quarter or, what's the catalyst for fairly pushing that further in terms of say the balance of the year?

Again, here's what's difficult to forecast. Bellies were close to the – bellies at the beginning of the quarter and into the quarter were close to the same price, but they moved $70 during the quarter. It's that volatility that is creating a difficult environment to really forecast what the change is and how solid the change is. We have seen a lot of volatility, we believe, based on ASF. What we haven't seen as a long-term trend. And until you see the trend really develop, it's tough to manage this through the volatility.

And Mike, just at a higher level, as we've talked about a couple of times already. For the full, I mean, you think about Refrigerated Foods and JOTS delivering to offset the international downturn and then keep doing what we need to do. So, I mean Refrigerated Foods and JOTS will be important for us for the balance of the year.

Okay. Thank very much.

Thank you. And we will take our next question from Rupesh Parikh from Oppenheimer. Please go ahead your line is open.

Good morning. Thanks for taking my question. So I have two quick ones. So on the Jennie-O business, I just want to get a sense in terms of where we are in terms of regaining some of the distribution you lost last year. And then on the SKIPPY side, I understand obviously, you're still lapping some of the headwinds from last year but wanted to understand if there's any change in the competitive dynamics in the peanut butter shopper.

Yes. So the distribution gains, to answer your question, continue to be incremental, right? I mean, so the team is doing a really nice job gaining back distribution, retailer by retailer. One of the things that we've talked about a couple of quarters ago that continues to play out is that we are seeing up four percentage points better growth in retailers who are selling and distributing the Jennie-O brand. And so as we're out telling the story to regain the distribution, it's a really good to be told. And our team is doing that and it's an incremental game. We said it's going to take some time, but as you can see in the results, it's really playing out. And then, we haven't seen any additional change to competitive activity since the deflationary pricing actions. As we said, we're lapping that coming at the end of Q2. And so we are hopeful that we can return to a sense of normalcy and growing the business that we do in terms of innovating, brand building and driving the business the way we know-how.

Great. Thank you.

And now we will take our next question from Eric Larson from Buckingham Research Group. Please go ahead your line is open.

Yes, thanks everyone. I know we're running out of time, so I'll make it pretty quick. Thanks for sneaking me in here.

No problem.

The recovery in JOTS is actually really encouraging. I think it's been the longest down cycle in Turkey that I've seen in a long time. So can you give us a little better flavor, just to dive a little deeper into the recovery, have we seen actual capacity reductions by the industry? Obviously, we're seeing placements and egg sets and stuff going down, but is it for real? And are the competitors more rational than what we've seen maybe in the past year? Just a little more detail and that would be helpful.

Yes, I think the key thing there, Eric and you talked about is really the fundamentals, right? I mean we're seeing favorable fundamentals, which would be driven by the entire industry. So how they’re doing, what they're doing, when they're doing will all feed into fundamentals. That's what we're watching. And we do see those positive trends. You add to that the excellent results across our supply chain, and live production, and manufacturing, combined with the incremental gains on regaining distribution, that's why we're a bit optimistic when we talked about the momentum that the business has.

Okay. And then I may have missed this this is my follow-up. You may have already stated this, but when do you actually lap year-over-year the the deflation that you saw in peanut butter pricing?

That's at the end of Q2..

End of Q2. So Q3 will be more – will be at least apples-to-apples on that factor?

Exactly, we should start getting a clearer read on the business.

Okay. Thank you.

Yes thanks Eric.

Thank you. And now we take our next question from Adam Samuelson from Goldman Sachs. Please go ahead.

Thanks. And thanks for squeezing me in. Maybe clarification questions. In Refrigerated, you alluded the higher commodity profits. In the past, you've given some dimension to changes in commodity profits. Any way you can frame that this quarter? And also, you said you took out some hedging losses on odds [ph] is any freight way to frame kind of what that – the impact of that was?

Well the commodity margins or the commodity margins, the pork operating margins were in line with our long-term profile.

Okay. And then in the Refrigerated business and the commentary both in the press release and on the call today. Didn't hear any mention of Columbus or Fontanini. Just characterization of how those businesses have been progressing.?

Sure. Okay. Thanks for bringing those up. And we just have a lot of other things to talk about. Been very pleased with the work being done by our deli group, specifically with the Columbus brand. We got a great holiday season with the Columbus, you probably saw the announcement that we're building a new facility in Omaha, Nebraska to support the growth of that brand. And so things are going really well. Same thing with Fontanini. We put in a new line there last year because we needed to expand the capacity. Our food service team has really taken that business and run with it just the way we designed the strategy. So both those businesses are very healthy and in great shape.

I appreciate the color. Thank you.

Thanks Adam.

Thank you. And now we take our last question from Rebecca Scheuneman from Morningstar.

Good morning. Thanks for squeezing in. So real quick on the lower profit margins in the grocery products segment is there any way you can somewhat quantify the different factors that you talk about the divestiture having an impact, lower volumes, lower contract manufacturing, higher raw material costs, et cetera. Is there any way you can kind of help quantify that? And related to that I believe that when you talked about the CytoSport divestiture, you said that the operating margins were slightly lower than the corporate average, which would mean that they're definitely lower than the segment. So I would think it would be margin accretive the divestiture unless you're talking about standard overhead or something in that regard. So just some clarity there would be great. Thanks.

Yes, the two biggest issues are the impact of the contract manufacturing business, that has been a difficult business. And then the second part would be the run-up in the raw material costs for the segment. So the focus really are the two things. Really, in terms of your second part of your question we can have Mason follow-up here to give you a little more detail. But there's really not anything of any magnitude that are impacting it, left over from the CytoSport divestiture. But we'll have him follow-up with you Rebecca.

Okay. Sounds great. And just real quick then, so the contract manufacturing is that something that's going to drag throughout the remainder of the year?

Yes, I mean we've seen that recently trend trend down. Just as a reminder, it's not a business that is I'll say strategic for us, it has been more of a capacity play. And so it does ebb and flow but the key takeaway is that it has trended down in it and it's been a difficult business.

Okay. Thank you.

Thank you. It's appears that there are no further questions at this time. Mr. Snee, I'd like to turn the call back to you for any additional crossings remarks.

Great. Well, thank you all for joining us today. We are off to a solid start in Q1 and we know that we must continue to execute our plan for the balance of the year. To our team members online, my sincere thanks for everything, all of you do to keep our company uncommon. Have a great day.

This concludes today’s call. Thank you for your participation. You may now disconnect.