Good day and welcome to the Hormel Foods Second Quarter 2016 Earnings Conference Call. [Operator Instructions] Today’s conference is being recorded. At this time, I would like to turn the conference over to Jana Haynes, Director of Investor Relations. Please go ahead.

Thank you. Good morning. Welcome to the Hormel Foods conference call for the second quarter of fiscal 2016. We released our results this morning before the market opened, around 6:30 a.m. Eastern Time. In addition, we issued a separate press release announcing the acquisition of Justin’s LLC. If you did not receive a copy of the releases, you can find them on our website at hormelfoods.com under the Investors section. On our call today is Jeff Ettinger, Chairman of the Board and Chief Executive Officer; Jim Snee, President and Chief Operating Officer; and Jody Feragen, Executive Vice President and Chief Financial Officer. Jeff will provide an overview of the quarter and then Jim will comment on the Justin’s acquisition, our review of the operating results, outlook and guidance for fiscal 2016. Jody will provide detailed financial results for the quarter. The line will open for questions following Jody’s remarks. [Operator Instructions] An audio replay of this call will be available beginning at 10:00 a.m. Central Time today, May 18, 2016. The dial-in number is 800-346-0976 and the access code is 2194984. It will also be posted to our website and archived for 1 year. Before we get started with the results of the quarter, I need to reference the Safe Harbor statement. Some of the comments made today will be forward-looking and are made under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those expressed in or implied by the statements we will be making. Among the factors that may affect the operating results of the company are fluctuations in the cost and availability of raw materials and market conditions for finished products. Factors that may affect actual results of the acquisition include, but are not limited to, whether and when the required regulatory approvals will be obtained, whether and when the company will be able to realize the expected financial results and accretive effect of the transaction and how customers, competitors and suppliers and employees will react to the transaction. Please refer to Pages 30 through 35 in the company’s Form 10-Q for the quarter ended January 24, 2016 for more details. It can be accessed on our website. Now, I will turn the call over to Jeff.

Thank you, Jana and good morning everyone. We are pleased to report record results for our second quarter of fiscal 2016. Earnings in the second quarter were $0.40 per share, up a robust 21% from last year. Sales for the quarter were $2.3 billion, a 1% increase despite lower turkey volumes at Jennie-O Turkey Store and soft export demand in our international segment. We reached an agreement to sell Diamond Crystal Brands in the second quarter and completed the transaction in recent days. This business, which was part of our Specialty Foods segment, represented approximately $260 million of annual sales. While Diamond Crystal Brands performed acceptably, it did not fit our long-term strategic priorities. As a result of the transaction, there was a small goodwill impairment recorded this quarter to reflect the final sales price. Our Specialty Foods Group will retain Hormel Health Labs, a provider of nutritional foods and beverages developed specifically for individuals with special dietary needs, which was previously a part of Diamond Crystal Brands. We continue to ensure a smooth transition for the customers and employees of Diamond Crystal Brands. In addition to our earnings release this morning, we also announced the acquisition of Justin’s LLC, a pioneer in the specialty nut butter category. The acquisition comes with the fast growing Justin’s brand of natural and organic products, a strong management team, access to new customers and several manufacturing agreements. The deal is subject to the customary closing conditions, including regulatory approvals in the United States and is expected to close within 60 days. I will now turn the call over to Jim Snee who will provide additional details about the Justin’s acquisition and also take you through each segment.

Well, thank you, Jeff and good morning everyone. Since Justin’s was founded in 2004, the business has experienced tremendous growth. Looking forward, we expect Justin’s to grow at low double-digit rates from a starting point of approximately $100 million in fiscal 2017 net sales. Justin’s will report into the Grocery Products segment. Justin’s enhances our scale in the nut butter category complementing our Skippy brand positioning very nicely. The Justin’s brand gives us a great platform in natural and organic specialty nut butter spreads, the fastest growing portion of the nut butter category. Justin’s also further balances our portfolio of brands towards younger, more health conscious and on-the-go consumers with their pioneering squeeze packs, a portable snack that comes in all seven of Justin’s nut butter flavors. We intend to leverage key Hormel Foods resources and supply chain, finance and R&D while leaving their mission and vision unchanged. We look forward to working with the Justin’s team in Boulder, Colorado and finalizing the acquisition in the coming weeks. I will now take you through each segment. Grocery Products segment profit was up 21% for the quarter. Input cost tailwinds and improved plant efficiencies drove the gains. Sales were up 1% led by Skippy peanut butter, Hormel chili, Wholly Guacamole and our Herdez line of authentic Mexican products. Sales for our chunk meats business and Compleats microwave meals were down this quarter. Our Skippy peanut butter products had a great quarter. Our traditional jarred peanut butter continues to capture share in the marketplace as our sales team gains additional distribution. Our most recent innovation, Skippy P.B. Bites has had many early successes and key measures such as trial and repeat are meeting our internal targets. The company continues to leverage its iconic brands in new and innovative ways. And this past…

Thank you, Jim. Good morning, everyone. Net earnings for the second quarter of fiscal 2016 totaled $215.4 million, up 20% over last year. Diluted earnings per share were $0.40, a 21% increase. Sales for the second quarter totaled $2.3 billion compared to $2.28 billion for the same period last year, a 1% increase. Turkey supply shortages and lower exports pressured sales during the quarter. Volume for the second quarter was 1.28 billion pounds, down less than 1% from the same quarter last year. As Jeff and Jim mentioned, we have reached an agreement to acquire Justin’s LLC. The purchase price is $286 million. The transaction is structured to provide an ongoing cash flow benefit resulting from the tax amortization of the stepped up basis of assets. The net present value of this tax cash flow benefit is estimated to be about $70 million. We expect fiscal 2016 to include about four months of results from Justin’s, with a slightly negative impact to earnings after factoring in the expected transaction costs and fair value adjustments. We estimate accretion associated with the deal to be approximately $0.01 for fiscal 2017. We expect to gain supply chain synergies that will be implemented over the next several years. We plan to finance this transaction with cash on hand and the short-term draws from our credit facility. Following the close, we will remain in a strong financial position to fund any other capital needs. Advertising expense for the quarter was $48.8 million compared to $39.5 million last year as we continue to build on our brand investment. Our effective tax rate in the second quarter was 33.6% versus 34.6% in fiscal 2015. For the full year, we expect our effective tax rate to be between 33.5% and 34%. The basic weighted average number of shares…

[Operator Instructions] We will go first to Adam Samuelson from Goldman Sachs. Please go ahead.

Great. Thanks. Good morning, everyone. Maybe first, I was hoping to get a little bit more color on volume trends in Refrigerated I think you reported 3% volume growth. Do you have the organic number if you strip that Applegate? I would guess it will actually be slightly negative, which would be a little bit of a deceleration versus last quarter and hoping to really understand kind of some of the mix there for where you are seeing the gains foodservice versus retail on some of the categories?

I think your overall – this is Jeff, Adam, your overall math would be correct. It would have been slightly down absent the Applegate added sales. In terms of the differential between parts of the business, I mean we did talk about the foodservice had a really very strong quarter. So clearly, we are a little bit off on some of the retail brands, but it was a mixed bag. They had some nice success with some of their items, such as Natural Choice and party trays and pepperoni, but they did have a couple of the franchises that were down somewhat.

And as you look ahead, any visibility to an improving retail cadence going into the summer? And maybe a little bit more color, Jeff and team on the margin mix implications of that stronger foodservice growth if that’s actually benefiting the margins meaningfully at this point? Thanks.

Yes. I mean, I think not just for Refrigerated, frankly, we are looking at a more favorable environment for net sales growth for multiple segments next quarter. This quarter was still not quite where we would like it to have been, but it was not at the level of declines that the last two or three quarters had been. So, we are seeing the sequential improvement. And our outlook heading into the second half, for example, you’ve got Jennie-O now with full volumes, so that will be a much more favorable picture. In terms of margins, who we have talked before about the foodservice is a solid contributor to overall refrigerated foods returns. The greater volatility piece more recently have been the processing margins were still quite strong this quarter although a little bit less than Q1.

We will take our next question from Farha Aslam from Stephens Inc. Please go ahead.

Hi, good morning.

Hi, Farha.

First question is on turkey, as your volume comes back how should we think about margins in that business and margins going into next year and longer term for turkey?

Yes, hi, Farha. Good morning. This is Jim. As we look into the future with our more normalized levels of production, obviously, the team is working hard to regain the distribution that was lost while supply was gone. And clearly, they were able to take advantage of some higher margins during that time. But as we look to the future, we would expect through – because of a couple of reasons. I mean, because of market conditions, but then also now that we are going to be able or have to sell all of the parts and not be able to take advantage of specific mix opportunities that our margins will return to the more normalized ranges, the guidance that we have provided. And I think we will start to see that in the back half of this year and into next year.

And then also your margin outlook for your Refrigerated Foods division longer term, do you anticipate the increased processing capacity that’s coming on in the U.S. hog and pork processing sector to impact margins for Hormel and how do you plan to kind of work around that?

Farha, this is Jeff. I mean, that will be clearly one of the pieces we assess when we create our business plan for 2017. We are sticking with our margin guidance that we have provided for each of the segments at the beginning of the year with the one exception being obviously we did update the Specialty Foods segment as we said we would once we had visibility of the Diamond Crystal transaction being completed, but we recognized that at this point a number of our segments are performing quite strongly against the guidance ranges we have provided. And when we have a more clear outlook for 2017 and beyond we would provide an update to that.

And we will go next to Akshay Jagdale from Jefferies. Please go ahead.

Good morning.

Hi, Akshay.

Hi. First question is on Refrigerated Foods, so the pork operating margins that everybody tracks in May were even lower than what you saw in the second quarter. Is that – can you help us – I know it’s difficult to look at those numbers and translate them to yours, but just generally speaking, what have you factored in into your guidance for the back half as far as pork operating margins go? Should they be similar to what we are seeing in the month of May, is that what’s factored in or how should we think about that?

Sure. I will take that one, Akshay. Yes, you are right, pork operating margins for May have been down about 40% from the averages in April and that’s probably a little bit faster decline than we originally anticipated. But as we have stated on our first quarter call, we really do expect pork operating margins to be higher for the full year because of the strong start we have had in the first half, but moderating in the back half. So predicting exactly where that’s going to go is not an easy task as you know.

Okay. And then can you talk a little bit more about Justin’s, the sales number you quoted is much higher than what we see in the measured channels. So clearly, they seem to have a big presence in the non-measured channel. Can you give us a sense of the channel mix? And maybe more importantly talk about why sort of buy this brand when you already have a good brand equity in the whole nut butter category? Why couldn’t you take that and extend it into some other categories that Justin’s is in, for example? Thanks. I will pass it on.

Yes, thanks, Akshay. This is Jeff and I will start with the question related to the sales number and then Jim is going to talk to the strategy piece. What we described for our anticipated sales for next year, for our full fiscal year, was in the $100 million range, but that’s for next year and the brand is growing at a nice clip. They clearly do have sales outside of the reported channels. I don’t have a precise quantification for you at this time in terms of the percentages. But clearly, that captures a good portion of them was been in the reported sales, but we should enjoy the growth next year.

And then Akshay, in terms of the strategy of the brand, we have had a lot of success since the acquisition of the Skippy brand. We have been able to obviously gain share, drive innovation, but also a lot of the research that we have done around the brand tells us that it’s not extendable into the space where Justin plays today. And so Justin’s affords us that opportunity to really be more complementary to the Skippy brand in a category that’s a rapidly growing category. We know that it attracts a younger, more health conscious on-the-go millennial consumer. And the growth that the business has seen over the last several years, clearly, we are earlier on the growth curve than we have been with some other acquisitions, which we are quite frankly excited about.

And we will go next to Heather Jones from BB&T Capital. Please go ahead.

Good morning and thank you for taking my questions. On Jennie-O, you guys are adding capacity there this year. Is that correct?

So, we have the favorable announced capital addition last year that was going to enable us to have more ground turkey capabilities. We suspended that last year when the avian influenza outbreak occurred and now we haven’t turned that back on. So, it’s not head capacity change, but it does enable us to support what’s been a really nice growing franchise for us, the lean ground products.

So, could you help us understand how much that could – how much that new value added capacity could add to your growth rate? And thinking about 2017, you are comparing against an extra week. However, you will have a full year of – well, assuming AI doesn’t recur, you have a full year of normalized volume. So, just wondering how we should think about ‘17 volume growth for Jennie-O?

Heather, we really don’t have any 2017 projections on either the top or bottom line at this point. But I would point out and we have talked in past presentations that, that ground turkey line is not a flash in the pan. I mean, that’s been a long-term strong superior CAGR deliverer vehicle for us. That was why we went ahead and made the investment in the capital. And we are comfortable that now that we can guarantee supply on a broad basis. And frankly, the Make The Switch campaign that Jim mentioned in his remarks, I mean, that’s the product line that’s featuring. So how easy that is to use in tacos and in burgers for consumers. And so we do think that will be part of the growth story for Jennie-O, but we won’t be able to give you a quantification of that until we have talked 2017 in November.

And we will go next to Mario Contreras from Deutsche Bank. Please go ahead.

Hi, good morning. I wanted to ask first in international, if you can just give a little bit of detail around what drove the challenges in brands like Skippy and Spam? And then what gives you confidence if those will recover in the second half year?

Yes. Good morning, Mario. This is Jim. The biggest issue that we faced is we finally have felt the impact of the strong dollar in some of our export markets. It’s not something that we have talked about in previous calls. But that really did impact both Skippy and Spam. There have been other supply issues that impacted our fresh pork business in terms of EU pork now flooding the Asian markets. So, it’s really been a combination of things. But obviously, we have seen moderation in the strength of the dollar. We feel like we are positioned in terms of our branding, our advertising, our pricing that the second half will shape up to be a much better half on a comparable basis versus 2015.

Okay, thanks. And then one other question, with respect to Justin’s, do they own any of their own manufacturing facilities? And then beyond that, can you just give a little bit of additional detail around where you see potential synergies coming from there?

Sure. They have actually done a great job of building the brand and building the business since 2004 with a network of coal manufacturers. And our team is very comfortable with that approach. And as we think about where synergies will come from having already worked with them on due diligence, we believe supply chain, finance, R&D, there is a number of opportunities to gain synergies and really leverage the capabilities of our organization. And as I mentioned in my comments, we do plan to still run the business out of Boulder, Colorado.

We will go next to Jeremy Scott from CLSA. Please go ahead.

Hi, good morning.

Hi.

Can you refresh us on your current mix of value-added versus commodity within Refrigerated Foods?

I mean, it’s in the 70% range. Frankly, it’s probably – it’s been in that range for a while. I think the bigger effort in recent years has been moving products even further up the value ladder. So, there is raw bacon, there is flavored bacon, there is microwavable bacon, now we have Bacon 1 for our foodservice group. And each case provide an added element of convenience or unique flavors that also enable us to obtain a better margin return for our efforts in creating those products.

Okay. And just on the resilience within the Refrigerated Foods business has been exceptional. I was hoping you could share how you expect given where processing margins have come down, how do you expect the back half to trend relative to the front half?

I mean, the back half will – should trend a little bit lower than what the first half was on an operating margin basis, but still very strong versus historical averages for the group.

We will take our next question from Eric Larson from Buckingham Research. Please go ahead.

Yes, good morning everyone.

Hi, Eric.

Just a couple of questions, back – one back on Jennie-O, Jeff and Jim, the – it’s kind of related to Heather’s question and adding some capacity to some of your individual product lines at Jennie-O, i.e., the grown turkey product lines, etcetera. Will you move into a net of buying position for your raw materials for that division eventually? Is that part of your strategy? And does that make sense to be diversified in that front rather than adding headcount? And then as kind of a follow-on, Jeff and I think we have talked a little about this maybe about a year ago, obviously, with that – with your operations so concentrated right in this upper Midwest area, when you had the flu impact, it obviously had a bigger impact on you as opposed to having more diversified potential operations in other parts of the country. Strategically, does it make sense to diversify your sourcing and maybe part of this is with more third-party sourcing to supply your Specialty Products?

So, on your first question, I mean, realistically, we were probably a couple of years away from having to address adequate meat supplies before the AI hit. And of course, that’s put us in a completely different mode for the past year and the team has done just a great job of surviving through that and positioning the brand well. So, that will come again in the future, where at some point we would have to assess, okay, do we engage in a more expanded program of buying in meat or do we look for further capacity capabilities of our own? And we will cross that bridge as that heads forward. On your second question, I mean, we did make an assessment of that. At this point, we have chosen to redouble our efforts within the region that we do operate to make sure that we are kind of on the front lines of understanding how disease issues like that might spread and what you can do to combat them. Ultimately, we feel we have a really nice position being within a 4-hour concentric circle of our operating plants and our production lines that allows for the maximum freshness of product. In general, absent last year’s AI outbreak, this is a very favorable grain market with positive basis situation in most cases. And so overall, we like our position of being where we are. But clearly, if we were starting to have repeated incidents, we might have to reassess that at some point.

[Operator Instructions] We will go next to Robert Moskow from Credit Suisse. Please go ahead.

Hi, thanks. Couple of questions. First one is you said pork processing margins down 40%. On my tracking they are still up versus historical levels though and I think versus year ago, if you factor in like overhead or shipping costs being down, transportation costs are lower, that’s also a benefit we have a service that does that for us, I want to know if you are seeing a similar thing? And then secondly on turkey, I continue to underestimate the profitability of turkey during AI and I just was hoping to get just a little more color on, once you get your volume back, do you think you go back to kind of a normal margin environment? Can it be a well above normal margin environment as a result of maybe some continued tight supplies out there? It’s just a little hard to figure out what it’s going to look like maybe you are having the same challenge when you get back to normal?

Okay. I think I may have misled you by saying this down 40%. That was just the average so far in May versus the average in April. So, that was a sequential. You are absolutely right, we do expect pork operating margins to be above last year’s in the back half of the year and somewhat higher than the historical averages.

Right.

And then Rob on your second – to your second question, I mean, our expectation is, as the production level returns to normal at Jennie-O Turkey Store that these margins will fall in line with our normalized margin range. And it is – it’s a combination of now that supply is back, we have seen some break in markets that we were able to capitalize on. And then clearly, the mix where we were perhaps being opportunistic in some of our buys, now we are going to have the supply of the birds and it’s going to be our responsibility to make sure that we are clearing all of that volume, which changes the margin structure of the business slightly. So, we really do expect that it will be more normalized range as we head into the future.

[Operator Instructions] We will go next to Jeremy Scott from CLSA. Please go ahead.

Hi, thanks for taking the follow-up. I was wondering if you could try again on Applegate, if you can share the run-rate of that business and if there has been any success in moving some of that into foodservice?

This is Jeff. What we mentioned was that the business is performing consistently with the kind of earnings guidance projection that we provided on the business early on. We are looking forward to having that additional supply available and being able to start seeing the sales successes and the team placing items then that utilize that supply. But overall, I mean, the Applegate brand still is connecting very well with the consumer that we are seeking to partner with, with that kind of a brand and we are very pleased with where Applegate sits today.

And as we think about opportunities in the future for foodservice, I mean, clearly, we are working on making sure that we regain the space with the retail business first. And then as supply opportunities present themselves over time, certainly, foodservice would be an opportunity.

And we will take a follow-up question from Akshay Jagdale. Please go ahead.

Thank you. So, just following up on Jennie-O Turkey, just a modeling question, so how should we be thinking of the volume growth for the back half? I mean, there was some pretty massive declines last year, right, strong double-digits. So, should we be expecting double-digit increases in volume in the back half as we are lapping those? Can you help us with that?

Yes. I mean, I don’t have the precise volume for you, but definitely, when it comes to on a net sales basis, it will be solidly double-digit for both of the upcoming quarters.

Okay. And in terms of guidance, can you remind us how much the divested business was contributing to EBIT? So, how much of your guidance change includes negative impact on EBIT from the business that you are selling? And do you have any sense as to what Justin’s might be accretive or dilutive in a full fiscal year?

So Akshay, as a reminder, our annualized sales for the divested portion of Diamond Crystal Brands was estimated around $260 million. And we have never given guidance for subdivisions of our segments. But I think the comment that our $1.56 to $1.60 outlook for the full year includes not having the benefit of Diamond Crystal in the back half of the year as well as a slightly negative impact from Justin’s and that’s mostly driven because we will have transaction costs that we recognize currently as well as an estimated step up in some fair value of the inventory. So, the $1.56 to $1.60 is all-in.

And then on Justin’s we did provide that for our first full year operating the business, we are looking at $0.01 a share. And clearly, the business with the double-digit growth expectations and what we think is going to be an ability to attain synergies that we think we will be able to move up from there over time.

We will take our next question from Robert Moskow. Please go ahead.

We got a lot of time. So, I am following up. I think you said there is a $70 million tax credit for Justin’s. How is that factored into your accretion guidance and how quickly can you realize the benefits from that? And then the second question, Jeff, I think you mentioned some declines on certain products within the Refrigerated Foods segment, can you elaborate on which products those are and maybe the circumstances, are you seeing competitors discounting or is it just some products just need to be revived a bit?

So I will take the tax benefit. That’s just a reflection of the purchase price. It has no P&L impact going forward. So, we will get the benefit from a tax perspective, but it will not impact us on the P&L. But if you think about what we paid for the business, I would look at it as the $276 million – $286 million less the $70 million tax shield to get to kind of the price though, but no P&L impact and that’s a cash flow that’s generated over the next 10 to 15 years.

And then Rob, on the volume question, couple of the categories that were impacted we have got some what we would consider to be more commodity deli business that is more of an intentional decline, if you will and we are okay with that. The second category that has become very competitive is the bacon category. And over the last several years, our team has done a great job really driving our share, really developing our brand. And most recently, we are facing some competitive activity. And so we did see some short-term declines, but we remain very confident in the category and our ability to continue to drive our share and brand over time.

I would d like to follow-up on a response we gave earlier too about the volumes in Refrigerated Foods. Without Applegate, they were slightly positive. So, tonnage was up for the quarter in Refrigerated, under 1%, but up.

[Operator Instructions] It looks like we do have another follow-up from Akshay Jagdale. Please go ahead.

Sorry, just one last one. This is for Jody. Can you talk a little bit about the free cash flow? It looks like working capital has been a little bit of a drag and so has the sort of other line. I am guessing that has to do with the acquisitions, but can you – because it’s a deflationary commodity environment, so you would expect maybe working capital to be in a source of cash. But can you just help us give us a little bit more color on what might be going on there?

So, we have had some – and I think you said free cash flow, so that includes stepped up capital expenditure base as well as we bring turkeys back into the barn. Remember, those animals are gone inventory the minute they are in egg, so those will be the two biggest drivers.

[Operator Instructions] And currently, there are no further questions in the queue.

So, thanks everyone for participating on the call today. And this is Jana Haynes last call as Director of Investor Relations. And we would like to thank her for her leadership of the Investor Relations function and wish her well in her new position as Vice President and Controller. And at the same time, we welcome Nathan Annis as the new Director of Investor Relations and look forward to working with him. Have a great day.

And this does conclude your teleconference for today. Thank you for your participation. You may disconnect at anytime.