Hormel Foods Corporation
Q1 2011 Earnings Call Transcript

Published: 23 Feb 2011

[Company Speaker:]

Well, good afternoon, everybody. If everybody could find their seats as quickly as possible, I'd like to get the next presentation started. And to that end, we're delighted to have with us Jeff Ettinger, the Chairman, CEO and President of Hormel Foods; as well as Jody Feragen, Executive Vice President, Chief Financial Officer; and Kevin Jones, Director of Investor Relations. It's fair to say since taking over the helm, Jeff has transformed Hormel from the protein company that everyone would like to be, which is how I thought it was always described, to a food company, with results that most competitors would like to have over the last two or three years. With strong performance in both Refrigerated Foods and Jennie-O Turkey Store especially, it left them with a solid base for growth in the future, something we're looking forward to hearing about today. Jeff, take it away.

[Jeffrey Ettinger:]

Thank you very much, John [ph]. We certainly are going to provide some forward looking statements this afternoon, but before we do that, we want to start with the here and now. This morning was earnings announcement morning for our first quarter of 2011. And we're very pleased that our team was able to deliver an outstanding quarter. We saw sales increase of 11%, with all five operating segments that register year-over-year gains for the quarter. As you can see from the tonnage comparison, we had a certain amount of volume increase. The remainder of the increase in net sales would be attributable to pricing and to enhanced mix of the products. On an earnings per share basis at $0.55 per share, we registered a 34% increase for the quarter, again very strong results. And all of these numbers are post lift [ph] (12

[Jody Feragen:]

Thank you, Jeff. It's certainly nice to be in Florida when you come from cold and snowy Minnesota. But it's also nice to be here on a day that we announce record earnings and record sales for our first quarter. And those sales were really driven by the results at our Jennie-O Turkey Store. They were really exceptional results, segment profit up 122% versus last year. Those profits were positively impacted by higher commodity meat prices, continued operational and efficiency gains in their supply chain, increased value-added sales and favorable hedge position. Sales for the quarter were up 14%, driven by increased volume and the higher prices we talked about on commodity meat. But also our year-end ad campaign helped drive our value-added sales up high single digits and we saw double-digit growth in our Jennie-O Turkey Store turkey burgers and fresh tray pack items. Refrigerated Foods continued to benefit from the higher pork operating profit. Those profits helped offset lower margins in some of our value-added businesses, such as our Meat Products and Foodservice groups that continued to fight against higher pork prices. Refrigerated Foods sales grew 13%. Our Meat Products group saw nice growth with Hormel Party Trays, Hormel pepperoni, Hormel Refrigerated Entrées and our newer Hormel Country Crock Side Dish items. Within Value-added Fresh Meat, our Hormel Always Tender flavored meats showed nice growth for the first quarter as well. Our Foodservice group also saw sales increase, particularly in their Natural Choice and their Barbecue lines. Our Foodservice group continues to see the impact of a weak economy, particularly as it impacts restaurant traffic. Our Grocery Products segment was negatively impacted with both higher input costs, as well as difficult comparisons with a very strong quarter last year. Sales did grow 6%, fueled by growth in our MegaMex products, as well as increased sales of some of our more legacy items, including the SPAM family of products, Hormel Mary Kitchen hash and Hormel Chili. Specialty Foods was similarly impacted this quarter. They had higher commodity costs and they experienced a 12% decline in their segment profit. Sales grew modestly as sales of sugar and blended items were able to offset lower contract packaging sales. And now we were pleased this quarter that our All Other or what's mainly our International segment rebounded this quarter, with segment profit up 29% from last year on a 17% increase in sales. They benefited from strong export sales of the SPAM family of products, as well as fresh pork and their JVs also had better performance this quarter than last year. Since we're not having our usual conversation over the telephone lines, there are some financial metrics that we usually go over in our call, and I thought it would be appropriate to address those quickly today. SG&A expenses were flat to last year, but on increased sales, they declined to 7.6% of sales versus 8.4% last year. And we would expect SG&A's expenses to be somewhere around 8% for the next three quarters. Interest expense for the quarter was flat to last year, and we expect full year interest expense to be in the $20 million to $23 million range. Our effective tax rate for the first quarter was 34.7%, so a little bit under where I guided you. But remember we had the late addition of the R&D tax credit that came to us late in the fall. That was versus the 33.8% effective tax rate last year. And for the full year, we will expect our effective tax rate to be in the 35% to 36% range. Depreciation and amortization, again flat with last year, and we expect the full year to be about $125 million. Along with great results comes great cash flow. We continue to look at prioritizing our usage for our cash flow and the first use is obviously to invest in the future growth of our business. And Jeff will really talk about some of the drivers there later. We’ll look to make those investments either internally through projects that we develop or through acquisitions. Our first quarter capital expenditures and property acquisitions totaled $24 million and we're continuing to expect that capital expenditures will be about $120 million to $130 million for the full year. One of the acquisitions that we made in 2010 was the Country Crock line of side dishes. Just a little update, we have integrated this into our Refrigerated Foods entrée line. We've branded it with the Hormel brands so that our consumers can see the connection with our more traditional refrigerated entrées that are more meat-based. And then more recently, we acquired Don Miguel Foods through our MegaMex Foods joint venture. And Jeff will also give me some update on how this fits with our strategy of MegaMex. And then we were really pleased in 2010 to open our LEED Gold-certified Dubuque plant. This state-of-the-art facility currently produces Hormel Compleats microwave meals, as well as our chunk chicken items. Another priority for our use of cash is to return it to our shareholders, and I think our record in the area of dividend speaks for itself. We have 45 years of consecutive annual dividend increases. Not a lot of other companies can say that today. For 2011, we increased our dividend by 21%, and over the last five years -- and that's five years that have included some pretty rough economic times, we've been able to attain a 13% compound annual growth rate. Just as a reminder, our dividend policy is, on a payout basis, to pay out 45% of our trailing five-year average earnings. But we also look to target ourselves to get a dividend yield that's closer to our packaged food peers, and I will tell you we have some room to grow in that area. We also look to return cash to our shareholders through share repurchases. In the first quarter, we spent $14 million and we have $8.3 million shares left under our current share authorization. I think we've heard about market conditions all morning, at least those conversations that I've listened in on, and as Jeff had indicated in his preview of the quarter, we certainly are faced with increased cost in many areas. But I thought I'd like to go into depth on what we're thinking about these cost inputs and how we've looked at them for the balance of our year. Hog prices are certainly expected to remain high and go higher. Great export demand, as well as pretty flat production levels should support those higher prices. We also expect to see strong demand for the USDA pork cutout. So that should provide positive pork operating margins, but we do not think that they're going to be at the same levels that we experienced in 2010. So right now, they're pretty high. We expect that to decrease through the balance of the year. Grain prices, we expect to rise between 45% and 50% for the year and remain volatile as they have done in the first quarter. Our hedge positions will offset a portion of those increases. As a reminder, we have a policy of hedging about between 25% and 75% of our grain needs. We did indicate at the end of our fourth quarter call that we were on the high side of that. So we're seeing the benefit and certainly Jennie-O saw some of that in the first quarter. And then we have other packaging and ingredient costs that will increase anywhere from 3% to 7% range. So we have the buffers of a strong demand on the cutout. We have buffers of some hedged things, but we also have savings initiatives that go throughout our organization. Certainly we're seeing, the benefits of our enterprise live sourcing initiative [ph] on the purchasing side. We've seen and continued to see great savings through logistics projects. And the one thing about Hormel is our culture of continuous improvement and the fact that everyone, everyday, looks for savings, and we see that through labor productivity, as well as yields in our plants. One of the other stories that was common this morning was pricing. We have advance pricing on some of our products basically across I think every segment has experienced some pricing action. Given the current commodity environment, we'll continue to look at pricing going forward. We work closely with our customers, and we also keep in mind the value proposition that we have with our consumers. Our long-term growth model really hasn't changed. We look to grow our top line by 5%. We think an earnings per share growth of 10% is attainable in the long-term, and that will continue to provide our shareholders with double-digit returns. I'll now turn it over to Jeff and he'll talk about some of our growth platforms.

[Jeffrey Ettinger:]

Thanks, Jody. So I want to go into what's the Hormel story, what has been the story and why do we have confidence in our ability to continue to grow the company in the future? And to us, there's a few kind of hallmark principles or elements of our company. I don't know that they necessarily all set us apart, but in combination, they’ve been the driver of the engine. There's our balanced business model, there's our long heritage of innovation in our success in both new product innovation and in cost base innovation as Jody just referred to and then there's the strong brands that we have with leading shares in certain categories. And I'm going to spend quite a bit of time this afternoon building into those brands and talking to you about six to eight different growth platforms, areas where we're experiencing extra growth that's really fueling our overall success. Starting with the balanced modeling, and Hormel Foods really is the last company out there that has both a fairly deep investment in the protein side of the business, but is deeply involved in packaged foods. We think that provides us with some advantages as we intend to be a leading player in value added meals and value-added products that feature protein-based items. We also have a balance between retail and foodservice in our organization. The franchises I'm going to highlight later, the growth platforms, I'm going to talk about the retail side today. The branded areas that are probably more noticeable and popular in the marketplace, but we are a significant Foodservice company as well. Over $2 billion in our total sales, spread throughout four different business segments are in the Foodservice realm. Other areas of balance that may be less familiar to the audience here today. We are deeply invested in two of the proteins in terms of deep supply-chain. Hormel was started in 1891 as a pork company and we've been at it ever since. We don't try to be the largest company in that segment in terms of total processed pounds. We're not particularly vertical. The only area of the company that are vertical in pork would be out West in our Farmer John operation but we still are involved in basic processing and we're involved in the optimization of all the pork meats that comes off of that operation and is ultimately then sold in our refrigerated channel, our grocery channel or even on an export basis to International. And then our Turkey business is, similarly, has a deep supply-chain -- maybe even deeper, because in certain cases in the upper Midwest you are allowed to own your own farming assets. So we do own some of our own farm facilities. We have our own basic processing and again are involved in the optimization of all the turkey raw material that come into the system. But that's kind of it in terms of the deep investment in supply chain businesses. So any other products within, even protein-based products that we sell in our company -- we have many meal items that feature chicken or beef, we procure in all the chicken and beef. We do not have investments in supply chains in those areas. And clearly when it comes to cans or other kinds of packaging, seasonings and so forth, those are all purchased. And we think those two elements of being deeply invested in part of the business but being on the outside purchase market in other areas provides further balance for our company. And then lastly, we kind of long had a reputation of being financially a conservative entity. Clearly, we have very low debt, very solid cash position. We're certainly ready to make investments if the proper investments come our way. But we balance that with a truly innovative culture, a culture that is looking for areas that we can grow the business organically. We believe also that this balance has played out in terms of our operating results. We've reported on a basis of five reporting segments for many years now, -- and most years, year in, year out, most quarters, quarter in and quarter out, we have the majority of those segments delivering at a high-level. We know at any given time, one segment or another may be confronted with extra challenges in terms of some of the cost pressures they're feeling or something going on in the market. But the proof of the model is ultimately played out in the far right, which is that over time we've been able to drive total segment performance quarter after quarter and year after year. I had my first appearance before the CAGNY audience in 2005, and so you can see that track record over the years that our team has been together has really been quite strong. Another element of balance that we're going to highlight today is the balance between, as many of the companies you've talked to today, we have our legacy platforms. We have our products that have been with us for a long time, and we look at trying to find ways to keep growing those platforms. But we have a number of relatively newer, exciting growth platforms, some of which we've acquired, some of which we've created on our own. And I'm going to highlight as I mention probably six to eight of those for you here in a couple of minutes. Before we move onto the next section, I want to provide you with a little further background as sort of the balance of Hormel or what's important to Hormel beyond the numbers, and beyond the brands. And to do that, we brought a video segment that I hope will accomplish that and we'll run that now. [Video Presentation] So we started with the balance model. The next key to Hormel Foods' success is innovation. The story that appeared first in the video, you see on the slide here, appeared in the Minneapolis Star Tribune this fall and really highlighted the headline appetite for innovation and highlighted the success that we've had in driving growth through new products. When we create new products, we clearly are looking to create items that are convenient and flavorful -- those are right of the gate, that have to meet at least those requirements. And where appropriate, we're looking for items that can have a nutritious or helpful element to them. We understand that there’s part of our portfolio, whether it's bacon or SPAM that are probably never going to be viewed as health items by most consumers, but we have added items such as Natural Choice or our Jennie-O Turkey Store portfolio or the newer items within our Compleats franchise such as Compleats and Compleats for Kids that do meet an excellent nutritional profile for consumers. And then it’s become obviously more and more important in the last couple of years to really look at value as is mentioned by other speakers today, value is more than just low price. It’s a complete value proposition and that's an essential element as we develop a new product. We created a challenge back in our company, back in early part of the decade of the 2000s, we wanted to create $1 billion worth of sales of new products by the year 2009. We achieved that $1 billion challenge two years early. We hit it in 2007 and so now as a team that's always looking for the next challenge, we decided to up the bar a bit and go for $2 billion and actually compress the timeframe and try to get that done by 2012, still measuring those items that have been introduced since the year 2000. We hit a little leveling off point in the year 2009. As the recession hit, many companies experienced the same thing, a gravitation towards the more traditional and a more of a hesitation to take a chance on a new item. But we are pleased to see that in 2010, we reaccelerated our progress and we were at $1.5 billion of sales in 2010 alone of items that were new to the marketplace since the year 2000. So we're still encouraged and are still fighting for that $2 billion goal by the end of 2012. These innovative items need to be put out in a form that has reasonable level of familiarity to consumers, and we're blessed with brands that are well known and that have some stretch to them, the Hormel brand has been around obviously since the beginning of the company, and it's on such venerable items such as Hormel Chili or Hormel pepperoni or Hormel Cure 81. But in recent years we've been able to add that brand to more modern items such as our Party Tray franchise, our Hormel Compleats and even Hormel Natural Choice. In the Jennie-O Turkey Store area of the business, we're blessed with the one brand when we made the acquisition of the Turkey store, we did the research which allowed us to combine those two brands. We took the look of the Turkey Store which was the green awning and combined it with the Jennie-O name, and so that entire portfolio can be supported by a single-branded proposition. And then we have certain other brands within the Hormel part of the portfolio that still stand for something unique and that the brand is important to stand on its own, and that would include the Lloyd's Barbecue franchise, that would include SPAM luncheon meat both in the U.S. and abroad and would include such items as Dinty Moore Beef Stew. It's very important for us to continue to nurture these brands with consumers to make sure that the new items are supported and that the traditional items continue to be viewed in a different basis. In 2010, we enhanced our advertising spending by 20% and we really focused that spending against a few key brand areas. I'm going to show you these commercials in the minute, but first, I want to kind of walk you through what you're going to see. We had a very significant campaign for the Hormel brand. You'll see televised versions of a campaign against Hormel pepperoni, our Hormel Compleats franchise and Hormel Natural Choice. On a global basis, SPAM is our most popular global brand. It has very significant market shares in certain markets in Asia, including Korea and in Guam and in Okinawa. It's never been quite as popular in mainland Japan, although consumers have a certain level of familiarity with it from travels they've had in other parts of the world. And so our international team made a very concerted effort this year to attain added distribution in Japan and support it with consumer advertising and thus far it's paying very nice dividends. We're very committed to the MegaMex portfolio of products that actually includes three brands that we support

[Ann Gurkin:]

I wanted to start with Jennie-O Turkey and complement you on the tremendous quarter of performance. But how should we think about that business going forward given the obvious challenges for grains, weigh that against capacity utilization improvement efficiencies? How should we think about margins in that business as we progress through the year? And then second, on the Export business, are there opportunities for that business given the sick pigs in Korea, any opportunities to step up that business?

[Jeffrey Ettinger:]

From a quarterly performance standpoint, the kind of operating margins that were generated in the first quarter would not be what we would model to on a full year basis. The first quarter is typically a fairly decent quarter, we have the Thanksgiving and Christmas seasons in there as well. But clearly all elements were aligned for Jennie-O Turkey Store during this last quarter. Some of those elements may shift as time goes on. It's hard to tell what's going to happen with the commodity meat market, but that was certainly a benefit to Jennie-O as we saw unseasonably strong thigh meat and breast meat market. Some we know are going to change because over time, the hedged positions that were advantageous for this quarter are going to lap off and we're going to be at a higher cost environment going forward. And that will be one of the challenges of that team, is to make sure that they find the efficiency savings and take the pricing necessary to cover down those elements. But clearly, the investment we've made in the brand, we feel is essential to continuing to introduce and support the value-added items that can lead to very strong performance for Jennie-O over time. On an international basis, it's a small part of our business. We do kind of recognize it the same way you do that it makes sense that it could be a growing protein and that we could be a growing player in that. But at this point, it's still quite small and we'll just kind of incrementally try to see if we can grow that. Diane Geissler - Credit Agricole Securities (USA) Inc. Could you just give us, really two questions here, could you give us a little bit more granularity on the turkey results? Sales were up 14%. Could you talk about price versus mix because it sounded like you had more value-add going through the quarter because of advertising, then of course volume. And also some kind of indication on what the hedge benefit was? And then my second question is really on pricing. Jeff, I think in the last call you had, you talked about pricing across a variety of items within the Grocery Products segment, but it wouldn't hit until the second quarter. Is that still the way we should think about pricing because if margins were down there year-on-year, should we look for some margin improvement in the second quarter and going forward?

[Jeffrey Ettinger:]

That is correct on Grocery Products. We took a wait-and-see attitude during most of fiscal 2010 about pricing to see what was going to happen with grain. It got worse. So wait-and-see went away as of the end of the fourth quarter. There's a certain notice element that all of in the Grocery business have to provide these days. For certain other franchises, where if they're market-based items such as bacon or fresh pork, those prices already have moved and were reflected in this quarter's results. But for items like Grocery Products which are more of a list price element, we actually announced two different waves of price increases, one of them kicks here in period four and the other one kicks in, in period six. So you're correct, in the first quarter results there really was no benefit from pricing for Grocery Products and we'll see that a little bit in the second quarter and much more so in the third quarter.

[Jody Feragen:]

And I think if I'm recalling the question correctly, it was the driver of the Jennie-O Turkey Store sales, and the increase in price there was mostly related to the commodity meat sales. They had increased volume in commodity meats as well as the higher prices than we'd experienced before. I would tell you that in the value-added businesses that they have moved pricing. But those same high commodity meat prices are the transfer values that go into those value-added products. So they're probably not fully covered down. The hedge benefit, I would say that there we're probably seeing the stronger portion of it in the early half of the year and that, that will tail down at the end of the year. So first and second quarters are probably going to have a better hedge benefit for Jennie-O than the end of the year, and I don't have specific numbers related to that.

[Kenneth Zaslow:]

To catch up on the $2 billion new product challenge, has Hormel actually accelerated the new product beyond what your original plan was, are we going to start to see them within the next three to six months? How does that play out? That's my first question.

[Jeffrey Ettinger:]

Well the measurement we use and other companies use different measurements, we only look at the current year sales, but we will track back which is now -- we started to measure the year 2000, we're still tracking some of those items. For a 120-year-old company, I guess 10 years to us is still relatively new. We always have a certain amount of new offerings coming out in the marketplace. Examples of that for this year would be Kids Compleats or the Pepperoni Stix and the Salami Stix, those items. But it's also the acceleration of other items. We see that. It takes time to change consumers' taste. We often are seeing accelerations in growth in year five, year six, year seven that's true with the retail grocery environments or frankly even in Foodservice. Again, I didn't spend much time on Foodservice today but we have franchises such as AUSTIN BLUES and Café H and the Natural Choice component of Foodservice that keep showing growth as well, and that has to support ultimately hitting that $2 billion goal.

[Kenneth Zaslow:]

On advertising, it seems like you got a higher return on investment on your advertising on the Turkey business. Are there other parts of your portfolio that maybe now you look at, and say, well maybe we should be spending a little bit more and we should accelerate into 2011 and be able to get a return similar to that of the Turkey business and which products. Can you just go into a little detail on that?

[Jeffrey Ettinger:]

It definitely is eye-opening. And in fact, I highlighted probably the major areas we have advertising expenditures but we had a few others this year. One would be out in the West Coast, for example, is our Farmer John franchise. They had very strong success with a local campaign effort. So you're always looking to see what's working, and I definitely am a believer of throwing logs on a fire that's burning already. And so if we find something that's being successful, we should look for an opportunity to enhance that advertising. And in terms of newer items, I think over time, you'll see us get more and more active in the Mexican food area. We have a number of brands there but we're starting to focus our attention on certain brands for certain product types. And so we'll see where that heads.

[Jonathan Feeney:]

Jeff, just to clarify, on one of your slides about Turkey, you cited 4% and 8% household penetration for turkey burgers, I believe, in ground meat or something. Is that Jennie-O number or is that category number?

[Jeffrey Ettinger:]

All of the numbers I cited on the slide today would be our brand household penetration.

[Jonathan Feeney:]

Roughly speaking, what's your share in those businesses and how's the market share for turkey burgers?

[Jeffrey Ettinger:]

In the lean ground area, our shares are in the 30%, 35% range and turkey burgers were well over half of the prepared frozen market on a measured basis.

[Jonathan Feeney:]

So you're still talking about pretty low numbers. I guess as that business potentially grows, I think it’s one of the questions I’ve probably asked a million times, but we've talked about a high single-digit type normalized margin for Jennie-O, but as processed gets bigger and bigger, it seems to maybe migrate upward. Has that happened? What’s a sort of normal conditions, operating margin for the Turkey business over the next five years?

[Jeffrey Ettinger:]

It's been hard to tell. I think we've had excellent success at least moving the range upward for the low-end and the high-end, but it has been so volatile with the kind of grain picture, that's by far the part of our business that’s most exposed, the direct involvement of grain increases and we've seen now two very significant waves there. We tried to reduce the swings in terms of the commodity market but as Jody talked about for this quarter, they still were a very relevant component of that portfolio. But we know we're moving it upward but we probably haven't settled in yet as to what exactly, if there's a new number there that we can move our goal to in Jennie-O Turkey Store.

[Jonathan Feeney:]

Jody, you mentioned high transfer prices. Are there any non-vertically integrated players out there who are sort of suffering in this environment knowing your competitive set?

[Jody Feragen:]

I guess if you we're just making the turkey lunch meat or something, you'd be buying it at market price. Jeff would be the better guy to answer your question.

[Jonathan Feeney:]

Let me be more specific. Have you seen any kind of unusual competitive activity that were on marketing or pricing that might indicate a level of competitive distress among players that aren’t vertically integrated or less so?

[Jeffrey Ettinger:]

Well, we tend to gravitate toward niches where we can have leading shares. We run up against different competition depending on what the segment's like. So that can be a fairly uncertain segment that was here a few minutes ago, it could more [indiscernible] (1

[Timothy Ramey:]

The cutout margins have been remarkably good for remarkably long. There's kind of a theory out there that the industry is being very restrained in terms of its ability to run on -- or willingness to run on Saturdays or add hours to their production week. Do you have any thoughts on why we're experiencing such great cut out margins even with hog prices up quite a bit?

[Jeffrey Ettinger:]

Well certainly, our volume’s been fairly steady. But as I talked about earlier, we're not one of the volume players within the pork segment. We're the fifth or sixth largest processor. I can’t speak for what the business rationales are for the other processors. What is clear in the marketplace is that at least one of the plants is closed and so there has been some tightening of capacity in the industry. And the other thing that seems very clear is robust export demand. And so that certainly is driving demand for certain other primals and that's spreading, right now at least, that processor margin. I think we've said over and over on our calls lately, we're not banking on that. It certainly has been a benefit to the group. It's been somewhat of a detriment to the value-added products to have that higher transfer in. But for example, in the guidance we provided for the remainder of the year, we're not counting on getting the double-digit processing numbers that have been generated here lately.

[Jody Feragen:]

I would just add part of what's keeping the hog numbers and processing numbers in check would be the supply on the ground. There's not expansion on the farms either.

[Robert Moskow:]

The Sara Lee Meats business will be a standalone business a year from now. When you think about your M&A strategy there's all kinds of ways to look at it. Would you make a big deal based on cost synergies alone, or would it have to be because you have some expertise that you think you could lend to a business like that? Or do you think that they have some expertise that you think that Hormel could benefit, or should we just not even answer the question and just move on?

[Jeffrey Ettinger:]

I really can't speak necessarily to Sara Lee in particular at all, but I certainly can talk about general acquisition philosophy, if that's okay with you. Our track record would say we try to make investments in areas we know at least something about. That we want it to be more than just that initial check. So if you look at the recent acquisition, it's Country Crock to add to that refrigerated food line. It's two expansions of the Mexican portfolio, it's Burke's pizza toppings to complement our pepperoni. It's several years ago the Turkey store, to blend in on a branded basis with Jennie-O. So that would be the likely areas we would look. We also have said in the past that we're certainly willing to look outside the United States, with a focus on Asia. But again, it's got to be the right deal at the right time at the right price for it to make sense with Hormel. And we certainly recognize we have both the cash and the debt capacity to expand our business through acquisitions if the right deal comes along.

[Akshay Jagdale:]

Focusing again on the Pork business, but I wanted to ask a question more on Grocery Products. It seems like hog prices are up, cutouts are up. And this year, the margins maintained through the whole system, again like last year, you may see some unprecedented levels of cutout prices and maybe even prices for some of your Grocery Products. Now, you have the largest percentage of value-added products from the companies that we follow. What has been the consumer reaction to higher niche prices and how are you looking at that?

[Jeffrey Ettinger:]

The key for us that we're going to measure -- we try to work frankly in a partnership with the retailer and a partnership with the Foodservice operator to attain that optimal pricing level. Everybody knows we have a lot of costs to cover, but we also know that we need to ultimately address what the consumer’s needs and desires are. To us, the key barometer is are our items are still growing, and at least through as we said here today through Q1, we had all five segments up. We're really in pretty good shape. That doesn't mean we don't have a few isolated portfolios within certain segments that we keep an eye on and those would probably be ones we’d be a little less likely to push pricing. But that is, as we move into a higher and higher cost environment, we clearly recognize that at least, to somewhat of an unknown [ph] (1

[Farha Aslam:]

Jody, you have about $350 million of debt on the balance sheet and otherwise your net debt free. Could you share with us how you think about your capital structure and how much leverage you'd be willing to take on for an acquisition?

[Jody Feragen:]

Providing it provides all the things that Jeff just predicated, that it would deliver -- certainly, we've always talked about being comfortable with up to $1 billion worth of debt. Our $350 million goes away June 1st. We probably will do a small offering just to keep our name out into the capital markets. But we would love to have the opportunity to invest in our business through an acquisition that delivers strategically for us what we need.

[Jeffrey Ettinger:]

Well, I think that's about all the time we have. Thank you very much again for a great presentation.