Hormel Foods Corporation
Q2 2017 Earnings Call Transcript

Published: 25 May 2017

[Operator:]

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Hormel Foods second quarter 2017 conference call. At this time, all participants are in a listen-only mode. As a reminder, this conference is being recorded Thursday, May 25, 2017. I would like to turn the conference over to Nathan Annis, Director of Investor Relations. Please go ahead, Mr. Annis.

[Nathan Annis:]

Good morning. Welcome to the Hormel Foods conference call for the second quarter of fiscal 2017. We released our results this morning before the market opened around 6

[Jim Snee:]

Thank you, Nathan. Good morning everyone. Earlier today we announced second quarter results of $0.39 per share, down 2.5% from last year. Sales for the quarter were down 5% on an 11% decrease in volume. Adjusted sales grew 2% while adjusted volume grew 1%. For the quarter, three of our five segments reported earnings growth. Refrigerated Foods, International, and Grocery Products grew earnings, while Specialty products earnings were down 16%. We frequently talk about the intentional balance we've built into our business and this quarter demonstrates the value of our balance model. Even though we had double-digit declines in our very important business at Jennie-O Turkey Store and divested two profitable but non-strategic businesses, we delivered earnings within $0.01 of last year's results. We were able to do this through impressive results from our meat products, foodservice, grocery products and international teams. In addition, all of our teams proactively managed expenses. Now I would like to talk through each of our segments. Jennie-O Turkey Store had another difficult quarter compared to last year with earnings down 29%. Sales were down 8% and volumes were down 6%. Segment profit margins declined from over 21% in the second quarter last year to 16% this year, similar to the first quarter. Three main issues affected Jennie-O Turkey Store’s profitability this quarter versus the same time last year

[James Sheehan:]

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

[Operator:]

[Operator Instructions] Our first question comes from Rupesh Parikh with Oppenheimer.

[Rupesh Parikh:]

Thanks for taking my question. So I want to discuss with Jennie-O Turkey Store segment in a little more detail. I was just curious when you look historically how long does it typically take for the industry to reduce production levels?

[Jim Snee:]

Good morning Rupesh. What we've said is, I mean, we believe this cycle is a twelve to eighteen months cycle. We don't know, we can't predict exactly when others in the industry will make a production cut. I do think one of the things that we have to remember is that there still are improvements that can happen along the way in that 12 to 18 months in terms of commodity pricing, competitive activity. So I mean that's how we're looking about -- looking at it and thinking about it.

[Rupesh Parikh:]

And then my related follow-up question, as you look at – as we look at your guidance for the back half of the year, what do you assume for turkey prices, do you assume we've bottomed now or do you assume they continue to get worse?

[Jim Snee:]

So from our perspective, I mean, we've built in the downside that we think can occur but from our perspective we believe that there could be some improvements in the back half of the year. But again as far as timing when that happens that's really hard to predict.

[Operator:]

Our next question comes from Ken Zaslow of Bank of Montreal.

[Ken Zaslow:]

Just continuing on the turkey side, just – two questions I have. One is the short term, and one is the longer term. So on the short term what prompted you to change -- I mean, I get to profitability but you guys totally reversed course on your volume side, it is my understanding. So how much was that just because, hey, look the environment is that bad that we're just going to cut so we’re going to change that? And then my second question which is actually probably more important, is okay, so with seven year low turkey prices, 2017 will probably be your fourth best year ever in turkey still. So how does this change your longer term view of the turkey operation in terms of 2018 and 2019, does this change your margin structure, is this something that we should – there is a structural issue here, can you talk about that as well?

[Jim Snee:]

Sure. Thanks, Ken. From our perspective the shorter term issue as we've looked at the business, starting with production, we have planned reductions for our fiscal year, some mid single digit reductions that really allow us to be a net buyer of breast meats. We did take further reductions in half one in response to the market conditions. You can say those are probably low single digits and that would put us for the full year slightly lower than 2014. Beyond that for the short term, I don't know that I would say we've changed course. And what we have seen is continued low commodity prices and others in the industry have not cut back yet but we haven't seen a change in competitive activity, still very strong and this is unique to us but clearly we’ve still seen some increased expenses in terms of bird performance, our investments that we're making which we believe are on trend with our WOA and of course the ongoing investment in biosecurity. So I mean that's the short term view. From our perspective on the long term side, I mean there is nothing structurally wrong with this business, I mean, these changes are -- they are market based, they are not fundamental issues to the business. And we said this on our first quarter call is whether good or bad we've been here before and we have emerged stronger as an organization. So we feel really good with our ability to deliver long term growth in this business and it's still about being able to drive value added sales. So we've been very pleased with the growth in our lean ground turkey up double digit this quarter, scan data that shows we're outperforming the category. So lots of good positive trends that set us up really well for the long term.

[Operator:]

We'll go next to Adam Samuelson with Goldman Sachs.

[Adam Samuelson:]

Maybe first at the corporate level, just trying to sense -- last quarter I think you talked to a full year outlook about 5% organic growth, for the year -- year to date you're running a little bit under 3, a bit around 2 for the quarter and you've got – you’re lapping an extra week in your fiscal fourth quarter with the Jennie-O reductions that you have outlined for the back half, do you have an updated thought on the sales view and any color by business would be helpful?

[Jim Snee:]

Sure Adam. Obviously the driver has been the jobs performance. As we go around the horn and we think about all of our businesses for the back half of the year, we believe our grocery product sales will stay in line with their long term growth goal of plus 3% and then plus the addition of the acquired Justin’s business. Refrigerated Foods, on an adjusted basis, would be in the low single digit range. For JOTS we are calling continued decreases in that mid single digit range. Specialty foods group will be positive mid single digits and international will be on track to deliver their long term stated growth goal of 10% sales growth. So really aside from the JOTS business we feel really good about the other four segments.

[Adam Samuelson:]

And then I want to go back to some comments in the prepared remarks that you made about pork harvest capacity on the packing side, and maybe the industry actually needing to rationalize some capacity long term, and you even alluded to, you needed to re-evaluate -- you might need to reevaluate your own capacity there. Maybe elaborate on that view little bit and do you view your pork packing capacity is higher cost relative to the industry or do you see less of a need for that vertical integration in your own business? Maybe a little more thought on how the pork harvest capacity fits in with the Hormel strategy relative to some of the increases in industry capacity that’s going on?

[James Sheehan:]

Well we constantly review our capacity. We've recently sold Farmer John which obviously reduced our capacity in the harvest level. We make changes to our harvest capacity on a regular basis. We look at it on a daily basis, we increase and decrease our harvest levels. We harvest hogs to provide a supply of raw materials for our value added products. We do that because of the consistency of the products that we attain by harvesting the hogs themselves and honestly we do it on a very economic basis. We have -- we purchase hogs that are very focused to be used in value added products which sometimes are slightly different than what you might see in the open market. We do purchase bellys, trims and at times ribs in the open market, we've been successful with that in the past. So I guess the answer to your question is that we look at our harvest levels on a daily basis both short term and long term by looking at our harvest levels.

[Operator:]

We'll go next to Rob Moskow with Credit Suisse.

[Robert Moskow:]

Hi, this is a technical question on the cash flow in the quarter, if I'm not mistaken it was pretty far below last year. Can you give us some color on the factors driving that and what do you expect cash flow to look like this year?

[James Sheehan:]

Certainly. In the quarter there are a couple of things that drove the change. There were tax payments, about $30 million in additional tax payment and that's really just a timing issue. It has to do with how we make our estimated federal income tax payments, we expect that that will come back to us in both the third and the fourth quarter. So that again is more of a timing issue. We also saw some variation in our workers -- in our accruals around some of our expenses, again more of a timing issue as to when they're paid during the year as opposed to the level of expense. We saw increases in dividends and share repurchase, that was about $25 million. But we also saw a lower CapEx expense. CapEx is supposed to come at about -- we expect it to come at about $190 million. That is the primary driver of what would change the CapEx, as we get later in the year we start to understand what projects are going to get completed in the year, what projects you're going to have investments in. So we don't see any significant change to our cash flow. We still see the company as having a very strong cash flow.

[Robert Moskow:]

And I just have a follow up, Jim and Jim. It just sounded a little inconsistent to hear the company talk about reducing Jennie-O production in the back half but then also talk about the renovation at Melrose, and $130 million of CapEx to build -- I know it's a further processing facility, so I guess it's different but do you view this as -- I don't know, how do I reconcile these two things? Is this a bet on 2019 being a much better year from a turkey perspective when you're fully operational? And then secondly the industry experts I talk to think that it's not going to be a 2018 recovery for turkey, it probably will be 2019 based on the fact that everyone seems to continue to increase production this year. Why are they increasing production even though results are that bad? And now that's a lot of questions but maybe you can help me out.

[Jim Snee:]

It is. But we will try to get to all of them. I think first, starting with the facility, and so well what we've said here is we are replacing a very aged facility in Melrose. And it is more for whole birds and that is a very -- I guess that we are focused on the value added business, I mean that's our long term growth driver but whole birds are still an integral part of the business. And so this isn't a bet that we're making, I mean this is an investment to update the facility to modernize the facility, make it more efficient. So we do feel like it sets us up well for the future and I mean the other thing to consider is that there is a positive NPV and this is a replacement facility. As you think about the production side of the business, there's increased production because you’ve had a lot of people who were uncertain about avian influenza. And so there was a chance throughout the year that you could have another outbreak, so you had people ramping up on production. As we move further in the year and we never say never but obviously it's less likely -- I think that's when you could see some production cuts. The other thing that I would say, Rob, is that there will be improvements along the way. If you want to think about when does it get back to more normalized or historical levels entirely, that will be hard to predict, we've said twelve to eighteen months. But I do think the other piece to consider is that there will be improvements along the way as commodity prices improves you see some more rational competitive activity and we've seen what's happened in some beef markets already. So I think all of those things will impact it and for us it’s the right long term on trend business to be in and there is nothing structurally wrong with the business. These are all market-based issues not fundamental issues.

[Robert Moskow:]

And one last question, you filed a shelf placement recently, can you tell us the rationale for that?

[James Sheehan:]

That was just a routine extension of the debt. It was expired and we've reviewed it.

[Operator:]

Our next question comes from Akshay Jagdale with Jefferies.

[Akshay Jagdale:]

Good morning. I wanted to ask about the refrigerated foods. Thanks for the update on the capacity. So you mentioned 6% increase -- can you clarify if that's one shift for all four plants and when exactly you expect that sort of 6% increase to be effective, I guess because you mentioned a couple of plants have opened now, a couple are going to open later. Do you have a sense roughly as to when that 6% will be sort of effective? And I have a follow-up to that.

[James Sheehan:]

Thank you, Akshay. 6% is for 2017 and I don't have any inside information about how those plants are operating or how fast they’ll come up to speed. So there will be additional capacity that will come online in 2018 but the 6% addresses the capacity -- the stated capacity that will come online in 2016, so I can’t provide any further information on the ramp up. The USDA is stating that there will be enough hogs to provide that production -- at that production level. It is part of the reason that we've told you -- we might see some short term volatility in the hog prices as – if the plants are delayed or if they start up faster than they thought that can create a very short term volatility in the market. We've seen that as some other plants have come online but again we see those as very short term and not real trends.

[Akshay Jagdale:]

So just so I understand your math, you’re just saying the daily capacity of these plants is x, if you look at that relative to what the daily capacity was before it's a 6% increase, it's not – you’re not doing any sort of weighted average calculation there because it’s coming –

[Jim Snee:]

No, we are not; that is correct. And the information that we're using is the stated information from those groups building the plants.

[Akshay Jagdale:]

And so as it relates to that expansion we understand the difficulty of modelling any of that. But can you just help us understand your base case for 2017, is that hog prices set up for the rest of the year, remain flattish year over year, because they've moved up but they're somewhat still below year ago? So with the capacity coming online, what's your expectation for the next two quarters in terms of the hog prices at sort of flattish year over year or –

[Jim Snee:]

Slightly higher; we don't believe that the plants coming online will have any long term impact on the prices of hogs. Again we believe that there could be some short term volatility but that's going to be very short term based on daily or weekly needs of hogs.

[Akshay Jagdale:]

And just one last one on turkey and I know we had discussed this in private as well. But just overall the turkey business that you have is value added, right? And so there's a lot of conversation today and the last couple of quarters on commodity prices. I know there was – these three factors that are impacting the performance there. But I mean over time, because you're so value added, aren’t you more -- shouldn't you be more and more insulated from commodity moves? Can you just address that sort of broader question? I mean I understand that quarter to quarter over six month period there can be some disconnects but one of the major issues you have is your cost of raising turkey is much higher and you have less pounds but the price itself long term you should be able to manage through that, right?

[Jim Snee:]

Yes, I think, Akshay, in a nutshell what you're saying is correct. I mean over the long term -- I mean we are a value added business. Once again we demonstrate that in the face of a tough operating quarter by being able to deliver double digit growth for lean ground and positive scan data, and still a very very profitable business. But I mean that doesn't mean we're immune to market conditions and competitive activity. So you've got a situation where we've got competing proteins, we know the first half of the year what the market was like for beef. So there certainly is market pressure that comes into play but through it all I mean we remain the price leader in the categories where we compete. It's a very profitable business that’s focused on long term value added growth and again these are short term market based issues, not structural or fundamental issues to the long term viability of the business.

[Operator:]

Our next question comes from Farha Aslam with Stephens, Incorporated.

[Farha Aslam:]

So again on Jennie-O, my first kind of question is around there. We’ve seen turnkey excess come down in the calendar first quarter of this year. Turkey excess were up 9% and here so far in the second calendar quarter we're down to flat. So the industry's cutting. How much do you think turkey excess need to go down for this recovery to happen and your twelve to eighteen months kind of target, when is the start date that we should use for that 12 to 18 months in your mind?

[James Sheehan:]

So as we look at that whole placement, it looks like it's down 3% to 5%, so we expect it to be down I guess I should say 3% to 5%. If you look at the inventory levels that just came out -- the freezer inventories that just came out this week, freezer inventories of breast meat are up over 50% above last year. So there still needs to be some clearing through the market of this excess inventory.

[Jim Snee:]

And I think in terms of the twelve to eighteen months, Farha, the bigger issue there and what I've said several times already is this idea that we will see improvements along the way both in the market and of course in our own business. And so we don't have today a starting line in terms of when the clock would set but for us it's more about the improvements that we know we'll see. And I think we've done the right things in terms of how we had planned reductions at the beginning of the year proactively managing our own business by taking further reductions in half one. So we're doing the right things to set ourselves up for improvements and clearly that could be accelerated by others in the industry doing the same.

[Farha Aslam:]

Yeah, clearly the industry is already responding. But then it looked your earnings for this year, they're essentially coming in plus or minus last to last year, when you look out into 2018, with all the puts and takes, do you anticipate earnings growth, do you anticipate being able to get back to your historical targeted algorithm of 5% top line growth and 10% EPS growth.

[Jim Snee:]

In terms of specific guidance for 2018 it's obviously too early. As we think about our business just in real general terms, our business is solid. We've got market impacts -- market based impacts impacting Jennie-O but there's a solid foundation. This intentional balance that we've built throughout our portfolio has allowed us to offset some of the devastating impact to jobs. This is the what if scenario but if JOTS is flat with year ago our business is up double digit on the bottom line. So that doesn't do anything to the results but it just shows you how solid our business is and how strong that balance is. But I mean we do believe that we will get through this and we will be able to deliver our long term growth algorithm of 5% and 10%.

[Operator:]

Our next question comes from Benjamin Theurer with Barclays.

[Benjamin Theurer:]

Just I have a follow-up question on your SG&A expenses. So you mentioned that basically there was a huge reduction in advertising from roughly $50 million last year to $30 million, so that's about $20 million. Taking a look at what you reported on SG&A, there is a decrease by about $30 million on a quarter over quarter but also on a year over year basis. So my question is I understand that you're likely to be a little more cautious on advertising especially on the Jennie-O side for the remainder of the year. But can we assume that more from the long run that that roughly 10 million savings is something recurring. Do you think there is an opportunity to service a bond and what's your expectation in terms of SG&A for the back half of the year. If you want to express it as a percentage of sales so more in absolute terms, it's just to get a little bit of a sense of how much more savings potential you might have on the U.S. side? Thank you.

[James Sheehan:]

Thanks for the question. You're right, our SG&A is down $30 million year over year, 19% million of that is advertising. We also experienced lower employee related expenses including the loss of the expenses related to the businesses that have been sold. But we've made other cuts around employee related expenses. We're very tight, we're looking at any changes in inventory levels or in employee levels very closely. We've taken a very proactive approach to expense manage due to the market conditions. We've focused on a great doctrines that will not harm long term growth, there are many examples of things that we've done that have managed expenses in this market condition. We've had sales meetings that that have been held on conference calls instead of the big meetings we've looked at how many people are going to conferences. We've reduced travel. Now those things are going to be needle movers but I think it's just the sense of attention to every expense that's going through the system and it's not only going on now but it's so that it's something that we use to play in to continue in the future. So we're very focused on expenses and I think this is a good time to refocus the staff about making sure that every dime is being spent wisely and efficiently.

[Benjamin Theurer:]

And the $19 million that was related to the advertising as of now but is that something towards the end of the year, i.e. 4Q into what’s mostly a more strong quarter throughout the year, do you expect advertising to pick up by then again just to well map lose market share in the different segments or is that something you would try to maintain in terms of spending what we had 2Q the rest of the year.

[Jim Snee:]

Benjamin, just to reiterate I mean the advertising reductions that we've made are short term reduction things. I mean we've been again very public and intentional about how we do support our brands and how important that is to us but in the short term reduction is the majority again have come from job. And not all of them have translated through to the bottom line some of the JOTS in particular shifted to trade to maintain on shelf competitiveness on shelf positions but remember even with that we're still the price leader. So we in these levels are comparable to 2015 and we have -- we have flax our advertising dollars before. For this, this has happened and we are committed to a long term growth and long term brand building. And just want to reiterate that we are absolutely committed to our brands and that the short term reduction is not putting them at risk.

[Operator:]

Our next question comes from Heather Jones with The Vertical Group.

[Heather Jones:]

I hate to beat a dead horse but I have a question on Jennie-O. And was just wondering if you could give us a sense of how much of the profitability pressure you experience right now is due to things like your liveability issues with NAE, et cetera because from what I understand most of the industry is still making money and I understand you all are if not to the best producer in the industry among the best, and your margins are still strong. So it doesn't seem like anyone's dire straits right now. So I was just wondering if you give us a sense of how much thanks like your operating expenses being higher and then once you regained some of the shelf space last turn AI, how much that could help your earnings as opposed to the industry cutting production.

[Jim Snee:]

I think you're correct, I mean earnings are still there, and are still strong. We are a very proud -- Jennie-O it was still a very profitable business for us, without getting too specific probably just more along the order of magnitude in terms of what’s having the greatest impact. The first one would be market conditions; second, would be pricing pressure; and then third would be our own increased expenses. So we are battling, it's a battle for us to maintain price competitiveness to maintain their shelf space but those are all the right fundamental things that were missed, these market conditions change that are going to set us up. We continue to make investments and are raised without antibiotics program, that is on trend with consumers and rather than make the cut this year we know that it's something that's going to set us up for the long term, so we will continue to invest in.

[Heather Jones:]

And going back to an earlier question on the refrigerated food side, so you guys are not sure that belly, trim and to a lesser extent rips. From my understanding the industry, your plants that you have remaining I believe it's two. They’re pretty efficient plants and so they don't seem to be two of the candidates to be shuttered when you were mentioned less efficient facilities. However do you think -- would you ever entertain the idea of simply just stop moving to buying primals for your value added business as opposed to being in the hog slaughter part of the business?

[Jim Snee:]

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

[Operator:]

Our next question comes from Eric Larson with The Buckingham Research.

[Eric Larson:]

Good morning everyone and thanks for squeezing me in here. Jim, I want to go back to really the pork markets. And we all know all important the export markets are for keeping a favorable balance in the U.S. In the U.S. market particularly given the amount of pork that we've been seeing coming into the market the last few years. We're now -- looks like we are going to be negotiating now Mexico is a huge partner for us on pork products particularly ham so. I'm not really sure if it makes much difference. I mean Mexico’s already moved to get corn from Argentina, Brazil, not much but they're moving. I am not sure makes much difference but I'm interested in your perspective in general and PCM – on the export markets in general and if NAFTA can have any kind of an impact on the dynamics of those export markets?

[Jim Snee:]

Eric, NAFTA is certainly an interesting agreement. And the large driver of the whole agreement is agricultural products, I mean that's the benefit that the U.S. gets from those agreements with Mexico and Canada. So again I'm not going to make a prediction as to what that is going to look like in the future. But I have a hard time believing that it's going to go away entirely. I think we'll see some renegotiation but we'll still be able to benefit from those neighboring markets.

[Operator:]

Our next question comes from Brett Andress with KeyBanc Capital Market.

[Brett Andress:]

I wanted to go back to turkey real quick. Could you comment a little bit more on the bird performance this quarter? I mean did it come in worse than you were expecting and maybe what's happening now here in May and I guess how long do you think it would take you to get these issues corrected?

[James Sheehan:]

Thanks Brett. The turkey performance was about where we thought it would be and improved a little bit close to the end of the quarter so we're seeing some improvement in the performance. It's a slow process. And it takes time to determine what you need to do to improve the turkey performance, there's a bit of a learning curve here and I think that we think that we are getting close to turning the corner on us.

[Brett Andress:]

And last one on the driver of the grocery margin, I think it was close to a record for the second quarter. So I just want to understand some of the puts and takes, maybe how much was advertising, and maybe what were some of the largest input benefits or maybe some of the largest pressures because I think avocadoes are spiking reasonably and it seems like your expectations for beef and pork inputs are also up. So maybe you can kind of clarify – maybe some of the expectations going forward.

[James Sheehan:]

In the second quarter I mean clearly we saw strong growth from SPAM, Wholly, Herdez, Guacamole and SKIPPY which are great margining businesses for us. Clearly we've had the inclusion of our Justin's business which has been great acquisition and of course we've talked about our recent innovations like Skippy Phoebe Bites and Herdez, as Wholly Guacamole, Salsa and those are all accretive innovations to the grocery products group. In terms of advertising, I would tell you it's a small small portion that improvement. And then we did have some offsets. Well for the quarter show we had had a difficult quarter and a large part of that was just some promotional activity that that didn't play out the way that we thought. But remember I mean we're coming off a banner two thousand and sixteen for our Chile business so again we feel really good about where that is heading. And so for the back half of the year I mean we're thinking about GP as more of the same, so strong growth from SPAM, Wholly, AAM, Justin’s continues to ramp up and then these are creative innovations are strong growth from stamp holy air to really good about portfolio to deliver long term stated goals for GP.

[Operator:]

Our next question comes from Jeremy Scott with Mizuho.

[Jeremy Scott:]

I just want to get a sense of the retail and foodservice landscape, and how that's changing given the impact of labor costs? Clearly we've seen the growth in the retail perimeter and on-site preparation of the past 10 years in grocery and what that had done to the center of the story lines but given that it's a much more labor intensive process it seems like the natural progression would be to outsource more of those perimeter goods for now in others and you could be the preferred providers, I would assume that that would translate the foodservice as well. What’s the opportunity here, what are you hearing from your customers with this business, what does that mean for the sustainability of refrigerated foods margins?

[Jim Snee:]

Jeremy, that’s a great question. I mean there certainly is a retail focus on that area of prepared food. It's not new focus, but I would tell you it feels like retailers are really starting to finally figure it out and sell for it and you're exactly right. I mean the business is more closely aligning with the traditional foodservice business. And that bodes really really well for us. I mean our ability to work with operators and so if you consider retail prepared foods and operator. Our ability to help them take out labor is second to none. I mean we're able to develop customized solutions to meet their needs in a variety of different ways that with ease of preparation taking out labor but still very very high quality products that consumers believe are prepared in the back of the house. So it is going to -- it's an area of focus for us because it's an area of focus for the retailers and sets up really well for how we run our foodservice business.

[Jeremy Scott:]

I guess in that same light, is a lot of regional specialty vendors that provide these goods to the retail perimeter. What’s your take on – the M&A pipeline is consolidating maybe some of that opportunity.

[Jim Snee:]

I don't -- I mean I don't want to speculate on that. I mean as we think about it certainly we've got our own criteria. We're looking for number one, number two brands, opportunity to become more global, accretive margins. So we've got our own criteria when we think about how we're going to approach the M&A market.

[Operator:]

Next we have an additional question from Robert Moskow with Credit Suisse.

[Robert Moskow:]

Just a follow up on party trays, normally that shows up in your prepared comments as demonstrating growth in the quarter. I certainly saw a lot of growth in the Nielsen data but you didn't mention it today. Have you lost any distribution on party trays?

[Jim Snee:]

No Ken, or Rob I'm sorry. We actually -- party trays are doing well. I mean as you go across the entire meat products portfolio, we didn't get too specific with it but the growth in the IRI data was very strong across many many categories. So we just didn't list it there and party trays continued to do really well for us and we do all have only so much space in the press release but you're right, party trays are very important to our meat products business and continue to be doing really well. End of Q&A

[Operator:]

It appears there are no further questions at this time. Sir, I'd like to turn the conference back to you for any additional or closing remarks.

[Jim Snee:]

Well thank you all very much for your participation today. While we're proud of the results for many of our businesses we clearly understand that our mission is to deliver growth. Our team knows what needs to be done this year and is fighting to deliver our key results. On behalf of the team here at Hormel Foods, thank you for joining us today and have an enjoyable long weekend.

[Operator:]

This concludes today's conference. Thank you for your participation. You may now disconnect.