Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Hormel Foods Third Quarter 2017 Conference Call. At this time, all participants are in a listen-only mode. As a reminder, this conference is being recorded Thursday, August 24, 2017. I would like to turn the conference over to Nathan Annis, Director of Investor Relations. Please go ahead, Mr. Annis.

Good morning. Welcome to the Hormel Foods conference call for the third quarter of fiscal 2017. We released our results this morning before the market opened around 6:30 AM Eastern. If you did not receive a copy of the release, you can find it on our website at www.hormelfoods.com under the Investors section. On our call today is Jim Snee, President and Chief Executive Officer; and Jim Sheehan, Senior Vice President and Chief Financial Officer. Jim Snee will provide a review each segment's performance for the quarter, a strategic review of the acquisitions of Fontanini and Ceratti and our outlook for the remainder of fiscal 2017. Jim Sheehan will provide detailed financial results for the quarter, a financial review of the acquisitions and further assumptions relating to our fiscal 2017 outlook. The line will be opened for questions following Jim Sheehan's remarks. As a courtesy to the other analysts, please limit yourself to one question with one follow-up. If you have additional questions, you are welcome to get back in the queue. An audio replay of this call will be available beginning at 11:00 AM today Central Standard Time. The dial-in number is 800-263-0877and the access code is 9221656. It will also be posted to our website and archived for one 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 costs and availability of raw materials and market conditions for finished products. Factors that may affect actual results of the acquisitions include, but are not limited to whether and when the company will be able to realize the expected financial results and accretive effective effectively the transactions and how customers, competitors, suppliers and employees will react to the transactions. Please refer to Pages 32 through 38 in the company's Form 10-Q for the quarter ended April 30, 2017 for more details. It can be accessed on our website. Additionally, please note the company uses non-GAAP results to provide investors with a better understanding of the company's operating performance by excluding the sales and volume impact of the divestiture of the Diamond Crystal Brands business, the divestiture of the Farmer John business, and the acquisition of Justin's specialty nut butters. Discussion on non-GAAP information is detailed in our press release located on our corporate website. Please note that during our call today, we will refer to these non-GAAP results as adjusted sales and volume. I will now turn the call over to Jim Snee.

Thank you, Nathan. Good morning, everyone. Earlier today, we announced third quarter results of $0.34 per share, down 6% from last year. Sales for the quarter were down 4% on a 9% decrease in volume. Adjusted sales grew 1% while adjusted volume was down 1%. While the results are not where we expected them to be, there is a lot of good news to share. I will briefly touch on some positive news in our company and then address the areas that are challenged and what actions we are taking to address those challenges. From a financial perspective, we posted record pretax earnings for the quarter as our two largest segments, Refrigerated Foods and Grocery Products more than offset declines in our three other segments. Adjusted net sales increased 1% even at Jennie-O Turkey store sales declined 9% or $35 million. We also made progress toward many of our strategic initiatives since the second quarter conference call. We committed $130 million in capital towards an expansion of one of our vacant facilities in Wichita, Kansas. We have experienced tremendous demand for bacon and this expansion will give us much-needed capacity for many of our premium precooked bacon items, most notably BACON 1. We expect this expansion to be completed in December 2018. We also announced two acquisitions of family-owned businesses. Last week we acquired Fontanini Italian Meats and Sausages. Since 1960, the Fontanini family has done a wonderful job growing their authentic, branded line of Italian meats and sausages items. Fontanini enhances our branded Hormel food service and Burke Pizza toppings businesses. This acquisition also gives us more production capacity and allows us to avoid major capital expenditures at our current facilities. We intend to integrate Fontanini into the refrigerated foods group over the next six to nine months. We…

Thank you, Jim. Good morning. Volume for the third quarter was £1.1 billion, a 9% decrease compared to last year. Sales for the third quarter were $2.2 billion, a 4% decrease. Excluding Justin's and the sale of Diamond Crystal Brands and Farmer John, adjusted volume decreased 1% and adjusted sales increased 1%. We generated record earnings before income taxes of $278 million up 1% from last year. Our effective tax rate in the third quarter was 34.3% compared to 28.6% last year. During the third quarter of last year we experienced an unusually low tax rate, which was a result of international restructuring. Our income taxes were 22% higher this quarter compared to last year. We expect our full-year tax rate to be between 33.25% and 33.75%. Net earnings for the third quarter were $183 million down 7% compared to last year. General corporate expenses were lower primarily due to the continued focus on strategic cost management. We expect general corporate expenses to be below last year for the fourth quarter. Depreciation and amortization for the quarter was $33 million unchanged from last year. We expect depreciation and amortization to be $125 million for 2017. Equity and earnings for the quarter was $4 million down 38% compared to last year. High avocado cost offset strong sales for MegaMex. Cash flow from operations was $250 million in the third quarter, up from $213 million last year. The increase was primarily related to decreases in working capital. Capital expenditures for the quarter totaled $42 million compared to $66 million last year. We expect capital expenditures to be approximately $190 million this year. Projects include the completion of our plant in China, the replacement of the whole bird plant in Melrose, the bacon expansion in Wichita and ongoing investments for food and employee…

Thank you. [Operator instructions] We'll take our first question from Adam Samuelson with Goldman Sachs.

Yes. Thanks. Good morning, everyone.

Good morning, Adam.

Maybe just at the outset Jim and Jim, help me think about the performance in the quarter and relative to the expectations you have on the May call and at the June Analyst Day, the bigger areas, the shortfall and as you think about the guidance cut, just maybe any way to parse the geography of where those cuts came from between raw materials and Refrigerated and Grocery and International and specialty and just how -- and the impact of the acquisitions in the short term and where things really fell short of your own internal projections two and three months ago?

Okay. Sounds good Adam. So, when you think about that guidance reduction, I guess the first thing I would tell you is think about the reductions being spread equally across all the segments and now that being said, there were a number of different factors in each of the statements. So, when you think about Grocery Products and Refrigerated Foods, primary driver there impacted by the record prices for the key inputs and as we mentioned, prising really won't be in effect until late in Q4. From a jobs perspective, the recovery that we expected to see in Q4 does not appear to be materializing and from an International perspective, the raw material impact in China combined with the additional Shanghai closing costs and then they are taking a portion of the deal costs that Jim mentioned. And then, really from Specialty Foods, we talked about again the raw material increase in contract packaging and then the miss on CytoSport. The sales didn't materialize the way we had anticipated. So that's how you can think about them across the business segments. From a quarterly perspective, probably want to think about them about the majority of the reduction was in Q3. We do have pricing that takes hold in the back half of Q4.

Okay. That's very helpful and then thinking about the implications into 2018, I appreciate that it's early still and certainly there is a lot of volatility in the near term, but as you starts to -- start penciling in pieces of 2018 can you talk about the confidence level on sustainability of Refrigerated margins, Jennie-O improvement, the accretion from the deals that you just alluded to, just the things that you're starting to get some line of sight to and where the thought is for next year?

Sure. We can do that for you Adam. I will open it by saying we're not giving guidance into 2018, but again as we go through the segments and you think about, clearly in Refrigerated Foods, we'll have the benefit of Fontanini, which is a great addition to our portfolio. We'll certainly be watching the changes in the hog markets and the volatility that could come. In Grocery Products, we know that will have our pricing in effect. Would tell you that we are also watching volumes as a result of that pricing and any changes we may need to make. But we're very optimistic about the Grocery Products portfolio. In terms of jobs, we expect to see some of these unfavorable market conditions still into 2018, but we at some point, jobs is going to get incrementally better. For Specialty Foods, we had a lot of moving parts over the last couple of years and we've got work to do, but we know that will get Muscle Milk back on track and then from an international perspective, we're pleased with the addition of the Ceratti brand in Brazil. We do believe that will have improvements in the China meat business and then of course the full benefit of having our new Jiaxing facility up and running, in country production of SPAM should have some really nice benefits there. So that's how we're starting to think about 2018 and some of the color around that.

I appreciate the color. Very helpful. I'll pass the line.

Okay. Thanks.

We'll take our next question from Rupesh Parikh with Oppenheimer.

Good morning and thanks for taking my question. So, I wanted to ask about the SG&A expense reduction during the quarter. If you can maybe provide more color in terms of the key drivers and how you're looking about the sustainability in the reduction that we saw?

Sure Rupesh. As we talked about at Investor Day, we're really focused on making strategic changes to our expense structure. We've been focused on supporting our critical initiatives, our long-term goals, but reducing expenses in other areas. So that has been the main focus of the group over the last six months. We did have an advertising reduction of $30 million in SG&A, but we're very pleased with the progress that we've seen around managing our expenses while supporting those long-term initiatives.

And then as you look at the pullback in the advertising spending during the quarter and I guess you've been going forward, do you believe that at all impacted your topline performance and do you expect it to impact your topline going forward?

Rupesh, we don't. We are obviously strategically looking at our advertising spend and we are committed to the long-term growth and health of our brands. This level that we're at is our 2015 level, which is still a very healthy level after several years of double-digit increases and these are all prudent decreases. The other thing I would remind you of is that we are shifting some of the dollars to trade, so that we're maintaining our in-store share of voice and we're confident that we'll still be able to drive sales growth.

Okay. Great. Thank you.

We'll take our next question from Robert Moskow with Credit Suisse.

Hi. Thank you. I guess I just wanted to understand a little bit about why it is taking this long to pass through these higher costs. You didn't mention bacon, I don't think in terms of what that pass-through looks like. Can you be a little more specific about it because it's a big part of what you do? Are you passing it through -- has it passed through already at retail because I know that's kind of quick? Is it taking longer in foodservice or not? And secondly, I didn't hear you mention retail bacon as being part of the things that went well in the quarter? Our Nielsen data would indicate that your sales are way up on retail bacon. Can you be more specific as to what's happening there just to give us a sense of comfort that to say the temporary phenomenon?

Absolutely Rob. So, I'll start with the pricing perspective and we've been very aggressive in the pricing action that we've taken across our entire portfolio and we frequently talk about from a retail perspective you're going to have a 45 to 60-day lag. And we have taken pricing on retail bacon, retail pepperoni and a whole slew of grocery products items. From a foodservice perspective, we certainly get the benefit of the price increase sooner on our street business, but we do have some contract business that can have a one to three-month lag. So, it really is a mixed bag, but I think the key take away here is that we have been very aggressive with all of our pricing action and we're priced to the peak of the market that we've seen. And as a reminder, because of that lag, that's why we're saying the pricing will take hold late in Q4. From a retail bacon performance, you're correct. We had an absolutely great quarter on volumes and sales, both in retail and foodservice. The challenge of course is that margins suffered due to the fast run up in belly prices and obviously it's a competitive category, but our focus has been growing our premium black label bacon line in retail. And of course, we've talked to you at Investor Day about the investments that we've made in BACON 1 and as I started off my comments, we're very excited about the strategic investment that we're making down in Wichita, Kansas in our Dold facility to support the high demand for foodservice BACON 1. So, pricing action, very aggressive, bacon performance very strong. Sets us up really well for the future.

That's great. Thank you for the color. And if I could move you to the acquisition that -- the Fontanini acquisition, it sound like a big part of the logic was opportunity cost avoidance I guess or however you want to put. You didn't have to build this new plant. But you are kind of holding out a number for synergies that could also help us in fiscal '18, 5% of sales is a typical number in the group, maybe 7% of sales for synergies. When do you think you'll give us some insight as to what those synergies could be?

Rob, this is Jim Snee. I am going to start with the first part about this fit, so your comment about I guess I call it capital avoidance, that was part of the equation. It wasn't a majority part of the equation. From our perspective and I’ve talked a lot about my desire to grow and accelerate our foodservice business. And so, this is a perfect addition to our foodservice business. It's branded, it's high margin business and it's a growing business. A direct sales organization, which in this day and age becomes less and less common. It mirrors the sales organization that we have and then we just see this as a great fit complementing our foodservice business. It also complements the Burke Organization and as I mentioned in my comments, we are up against some capacity constraints that we were going to have to spend some money and this gives us tremendous relief in that respect. Jim, I'll turn it over to you for the synergy portion.

Sure. And as you discussed, there was $150 million of capital avoidance, but also the $90 million of tax cash flow that really equates to $240 million of the $425 million that was spent. We obviously have looked at the synergies as we were doing our valuation. We feel that the synergies will be at or above -- at or slightly above what you would refer to as an average synergy, but that excludes the advantages that we have from both the capital avoidance and the benefit we have from the tax cash flow. We're working with the Fontanini team now to finalize the plans and we think that the synergies will be gained very quickly.

Got you. Last question, you helped us shape a little bit fiscal '18 by segment Jim Snee. Are any of these segments do you look at vulnerable to declines in fiscal '18? It is one particular segment that might be more vulnerable than others? I think the message was kind of like well, they could be flattish maybe with a little bit of upside I thought, but we've seen some unusual things happen across your business. So, I just want to know if there's one segment that appears more -- there is more that could go wrong I guess?

Sure. Rob again I am going to qualify it by saying, I am not giving guidance into 2018, but we're clearly watching what's happening in the hog market in Refrigerated Foods and the volatility associated with that. As Jim mentioned, Jim Sheehan mentioned, we know that there's additional capacity coming online and we're watching the three factors that we've talked about in the past; international demand, domestic demand and the corresponding capacity and where we sit right now after coming through the quarter, where four of our top seven inputs experience record prices because there was an adequate supply. That additional capacity is certainly needed in the short term. So, these are unprecedented changes in the hog industry. We're watching them closely and so I think the answer to your question, we're watching Refrigerated as we head into 2018.

If I could, if there is more capacity coming online and international demand is really, really strong, is there enough hogs out there to meet it all? Like is there -- are you saying there is a risk that hog futures might spike.

The interesting thing that has happened through the cycle is that hog costs have been very flat to last year. So, it looks like there is really a balance in the hog supply and the demand right now. The other thing that we think is important to understand is that the groups that are bringing these processing plants online are in fact hog producers. So, we certainly feel that they believe that there is adequate hog supplies to fill their plants.

Okay. Thank you.

We'll take our next question from Farha Aslam with Stephens.

Hi. Good morning.

Good morning, Farha.

It sounds like some of the disconnect between commodities and your margins is really on visibility. Could you share with us how you establish visibility into your commodity markets and what are you pricing policies overall on pricing?

So Farha, I guess our approach to pricing, we are looking at commodity markets on a very regular basis. We certainly have forecast in place at the beginning of the year. We look at those throughout the year. That helps us not only set the pricing at the beginning of the year, but what we think it might look like through the course of the year. From our perspective, the big disconnected in all of this is that we simply can't forecast record prices. We've taken the price action just as quickly as we could. We've priced these items to the peak of the market that we've seen and I would say, while the record high prices would be the disconnect, the connect would be that we have a proven ability to price in many market conditions and it's really that short term volatility that hurts us the most.

As we gave guidance into the back half of the year, We predicted the trends, as Jim said, we didn't predict that they would hit record highs that we did not predict the velocity at which they would change. So, we saw the trends coming. We didn't see the magnitude and the speed in which we're seeing in the volatility of the markets at this level.

So as commodities moderate, because it looks like belly prices are starting to moderate, avocados should start to come down. Do you expect your margins to expand as you have pricing in place?

Yeah certainly, that's why we're saying with the pricing taking hold in the back half of Q4 and then as I referenced, as I gave some color into our 2018 outlook, you're going to have grocery products that will benefit from the pricing that's in effect?

So that will be a positive for '18. That's helpful and then going into your Brazil acquisition, this is your first entry down in South America, it's rather small in scale. Do you have the distribution you need in the Brazilian market to get your products into retail and how quickly do you anticipate building scales down in South America?

Sure. Well first Farha, now you have to believe me when I say the pipeline was full all those quarters right, we finally got a couple across the finish line. But yeah, you're correct. Ceratti is our first entry into South America. They're premium branded items and it's a niche portfolio that we know very well. This is an established business and so they have distribution in the marketplace. They have a professional management team. It's an 85-year-old organization. So, as we look at it, yes from a $100 million perspective, you could say it's a small acquisition. We look at it to say this is our first entry point into South America and we see this as a platform for future acquisitions in South America. Clearly there are some learnings that we need to obtain along the way and this is a tremendous vehicle, a successful vehicle for us to be able to achieve those.

Helpful. Thank you.

We'll take our next question from Ken Zaslow with Bank of Montréal.

Hey. Good morning, everyone.

Good morning, Ken.

I'm going to go at this a little differently. I get the commodity issues. I get the input cost, the pricing all that, but what I am not fully understanding is I get the sense that there is increasing execution issues and let me just kind of -- and that something I guess is more my surprise than anything else. You got Applegate, you have CytoSport, you got China, help me understand how you're addressing the execution issue and why they have arisen and that's my first question and then I'll ask my follow-up.

Sure. The way you described it Ken, probably the one that I would agree with you on is the CytoSport piece. We did give expectations of double-digit growth and to be fully transparent, we missed that one. We're making some investments, got aggressive competition in that ready to drink C-store space and the results did not materialize the way we had anticipated. So, I would agree with you on that. When you talk about Applegate, not much has changed from the last time we talked about it, but as part of Refrigerated Foods, clearly, clearly the driver was record prices for key inputs and so had we not experienced those record prices, especially in Refrigerated Foods we would've been fine in that space. So, I certainly understand your commentary, but would say that the specialty area is the one where I can agree with you on.

What about the China issue because in Shanghai you closed the facility. There is increasing cost relative to expectations. Again, I am not trying -- you go through a management change obviously at the senior level. There is a couple times that you've missed consensus -- expectation and again I get the belly prices, all the prices we all get. But I feel like there is around the perimeter there seems to be more execution issues than I am used to over the last decade or so and I just didn't know if that's what you guys are seeing or it's just being exacerbated by the commodity outlook?

I think that last part is right on Ken. I think given the exacerbation of the commodity markets combined with what's happening at jobs with historic issues there as well, the one part on the China piece was we're starting up a significant plant and yeah, we certainly had plan to have the Shanghai plant closed and items transitioned and it took us a little longer in terms of quarters not years. And so, the cost spilled over and I appreciate your comment that the senior management team, but this is the same team that's been in place at very senior levels of our organization for the last five or 10 years and so I do think it is -- it's a situation that's exacerbated by the current market conditions and hopefully that helps with some color.

Okay. And then my second question is the outlook for 2018, help me out a little bit, is it an earnings growth story or is it a rebasing of your earnings power and there is a big distinction between the two because now you're obviously taking your base down pretty considerably. So is there a makeup in 2018 or you're just going to grow your five, ten that algorithm and again I'm looking for exact guidance, but I think there is a big difference between those two.

Again, I agree with you Ken, there is a difference between the two and we're not in position at this point to give additional guidance. I gave obviously the color that hopefully is helpful. I guess some additional color around the fire and 10 which is repetitive to what we've discussed. But clearly, we believe it's an all-in number, the 2% to 3% of organic topline growth that we've seen over the last several years, very achievable. Clearly, we need to leverage our balance sheet for accretive acquisitions for the other part of that five and 10. We've demonstrated our ability to do that here recently. Jim talked about some of the strategic cost management, operational efficiencies, clearly gross margin improvements will help us get to that 10% bottom line and I do think of going back to some of our earlier conversations around these commodity markets, we've got a proven ability to price in these many market conditions and it's really that short term volatility. So, I can't give you specific guidance, but hopefully the 2018 outlook color reminder on the five and 10 being a longer term all in number is helpful.

So, the five and 10 is a long-term number that means that if you were under, you need to overachieve in some other distant year, is that fair?

That's fair. Over time, you're current.

All right. Thank you.

Thank you.

We'll take our next question from Benjamin Theurer with Barclays. Mr. Theurer. Your line is open. You may want to de-press your mute function.

Hello. Can you hear me?

Yes, we can.

Okay. Kind of weird. Didn't work out. Sorry for that. I wanted to ask a question in regards to the Fontanini acquisition you've mentioned. So, I clearly get it that the CapEx benefit you have going forward, could you share a little bit more detail on the current profitability and what you think that business should be running up from an operating profit margin point of view? Is a similar as what you're having in the two categories or is it a little lower and you believe that through the synergies you can get it to the same level? Thanks for sharing the sales number, but would be good to get also a little bit detail on operating more EBITDA level if you can share that, that would be much appreciated and I have one other follow-up question.

Sure Benjamin. I guess the best answer I can give you on Fontanini is that the margins for the business are accretive to both Refrigerated Foods and the total company which is -- which obviously is a very good thing and just a reminder in our comments, we talked about it the $0.03 or $0.04 impact going forward.

Okay. And on the Brazilian acquisition, just to stick with the M&A business, so you've mentioned this is going to be basically a separated unit that's going to be completely separated run. Is that kind of business that you opportunistically purchase? Clearly the price is a little lower as having like a foot in the country to potentially where you expand into future and if it's not working out, it's not that much of a cost associated, but how do we have to think about that tiny step into Brail which tends to likely be profiting and growing country and in coming years after two years of very tough economic environment. So that's to understand a little bit more of the strategic part behind that.

Sure. So, this is a very strategic acquisition for us. It is not opportunistic. It provides a great opportunity for us, but it is very, very strategic. We've been working at acquiring this family-owned business for some time and those do take a little longer to get across the finish line. We see this as a platform for future growth in Brazil. We continue to look for opportunities -- already looking for opportunities to expand. We've got a great professional management team that comes along with the Ceratti acquisition and it's a $100 million business but it's a very healthy $100 million business that's growing and will serve as a great platform for the future.

One thing worth mentioning is that as we went into Brazil, we spent a great deal of time on due diligence and the deal also, the valuation of the deal will include a discount based on the country risk.

Okay. Perfect. That's much appreciated comment. Thank you very much.

We'll take our next question from Jeremy Scott with Mizuho.

Good morning.

Good morning.

So, the Refrigerated Foods margins, they came in actually nicely above where we were modeling and I was hoping if you could help break down some of the elements of the 230 Bps expansion year-on-year. The reason why I ask is, we were relatively clean comparison on core commodity margins outside of the trim pricing. So, anything you can put a number on would be very helpful as we look to build out '18 and '19 and maybe starting with Farmer John. We've been modeling it is a 40 Bps to 50 Bps ongoing tailwind, but it was something little bit more in the quarter and then if there is a greater mix shift to Applegate, your value-add component, what will Fontanini build in '18, maybe just kind of help out with your core the 230 Bps you can break that down by peace would be very helpful.

Okay. Jeremy, I think your assessment of Farmer John, there's I think dramatically difference there. Clearly the big driver for Refrigerated Foods is the improvements, the increases in the value-added sales and as we think about what's happened there, we've seen really a great performance in the quarter both in our meat products, which is our retail division across a number of different brands. The foodservice business continues to outperform the industry and when we talk about the increases with BACON 1 and their portfolio, certainly those margins are accretive to the overall Refrigerated Foods organization. So, it's the increase in value added, some of the mix shift even within the value-added and so again we remain very positive about the great work we're seeing in our Refrigerated Foods segment.

Okay. And then maybe just keep -- talk a little about what was the core reason for the Muscle Milk softness? Is it strictly competitive issues or were there something else going on in the quarter whether the channel shift or maybe break that down a little bit for us?

Sure. So, we talked about the channel and certainly it was primarily in ready to drink in the C-store and a year ago, would have been late summer, we had a voluntary recall on our ready to drink items and as we progressed at the end of 2016 and 2017, it's clear to us that we underestimated the impact of that voluntary recall. So, we had some pipeline full fill, certainly some favorable comps that gave us a positive feeling about the business. What we've see most recently is some of the aggressive competition in the ready to drink C-store space, really exposed the business hadn’t materialized the way we thought. The bigger thing for us is now what are the actions that we're going to take in terms of giving that business additional promotional support, working very aggressively with our distribution partner to gain back any lost distribution and making sure that we're priced appropriately in key channels. So, a number of different things there and we've got work to do as we head into 2018 with that brand.

Okay. Thank you.

Our next question comes from Heather Jones with Vertical Group.

Good morning. Thanks for taking the question. Just two quick questions, you mentioned I thought I caught a comment about pricing for the peak of these commodity input pressures and so like we've seen belly prices come down about 25%, pork trim is down about a third from its recent peak. So, as we're thinking about the pricing actions and that you've taken, did you price assuming that bellies are going to go back to that $2 plus range and trim, how should we think about the magnitude of price?

I think the key take away is we didn't think it was going to go up as fast as it did and so we didn't have a preconceived notion that it was going to moderate either. So, we priced it to the peak of the market. We know that obviously we work through some inventory, which takes longer in GP, our Grocery Products division than it does in some of the other divisions. So that is the way that we thought about pricing is that we are priced to the peak of the market.

Okay. And on the Turkey side, your volume declines, how much of that is purposeful declines to try to do your part to rightsize supply and demand and how much is related to the production issues that I don't know if you mentioned on this call, but I remember you mentioned on the Q2 call. So just how we can think about purposeful versus just an effect of health issues or whatever?

Yeah, I think from a business volume perspective, it was all purposeful, very intentional and that you can model that about a 7% decline.

Okay. Thank you so much.

You're welcome.

We'll take our next question from Akshay Jagdale with Jefferies.

Good morning. Thanks for taking the question. Just wanted to talk through the Refrigerated Foods outlook and obviously you've been -- I've listened to everything you've said. We appreciate the color. I know it's hard to predict what's going to happen in an event like this, but even if the volume is there right, so if the demand is there for the plants to run, why wouldn't the profitability be lower? So that's my question is would the processors are operating at three, four times normal profitability, so one would venture to say that okay, the demand there, they're going to operate the plants, but there's no way they're going to operate those plants at these profitability levels right. It is inherent in your expectations that the cut-out margin will normalize, that's my main question really is. I get that the hogs that will come to market will get sorted and there is significant supply out there, but we're really talking about what's going to happen with the cut-out margin and how it will impact your numbers? So is your expectation that cut-out margins will remain well above normal levels like they are now and then go ahead…

Well, as we discussed, what we focus on our hog cost, that our input cost primarily around bellies and 72% trim, we think the hogs will be slightly higher in the fourth quarter and even going into 2017. Bellies remain well above last year as freezer inventories are low and demand for bacon is very high. 72% trim is we expect to be above last year. What we have seen again is this what seems to be very much a balance in the hog supply and demand that isn't driving up the cost of the hogs. What we said before is the additional capacity is a benefit to us and we continue to watch the international domestic demand and the additional capacity coming online. Based on our analysis, we believe that the additional capacity is needed.

Right. So, net, net you think that next year is a more or less favorable operating environment for Refrigerated Foods compared to what you've seen last couple of years?

Well, we have the addition of Fontanini. We should be through the changes in the hog supply should be clear as the additional plants become online. Hopefully there's additional supply of the raw materials, so that there is not the type of volatility and spikes that we've seen in the bellies and the 72% trim. Markets, bellies or beef excuse me, has been very hard to predict. So, I think the color that Jim gave you would be -- is what we feel about the Refrigerated Foods outlook for 2018.

Okay. And just to summarize everything you've talked about in terms of commodity prices. So, the best way to think about it is I guess that you've seen a significant rise, I think you have given some numbers around how much you buy in the open market. But essentially the fourth quarter died down if I may is all related to the lag or significantly related to the lag between the commodity costs and the price pass through and that next year that will normalize, so you'll literally get that back right. It's not like you're just absorbing that. It's a timing issue and you get that margin back next year, but it's like a quarter and a half lag.

Akshay, what I will tell you about Refrigerated Foods is historically and the way the business is structured, we do suffer on a short-term basis when we see spikes in commodity prices. It compresses our margins. The velocity that occurred in this cycle, certainly added to that difficulty. But as prices decline, historically we expand our operating margins in Refrigerated Foods. We hate to say the cycle is a good thing, but in the long term, it would tell you that we will expand our operating margins as prices decline.

Perfect. I'll pass it on. Thank you.

And that does conclude today's question-and-answer session. I would now like to turn the call back over to Jim Snee for any additional or closing remarks.

Well, thank you all very much for participating in our call this morning. There's no doubt this year has been challenging for us and I'm confident we are making the right long-term decisions to drive growth for our company while maintaining focus on delivering our key financial results. Our team is working as hard as ever to continue our long-term growth story. On behalf of the team here at Hormel Foods, thank you for joining us today.

And that does conclude today's conference. Thank you for your participation. And you may now disconnect.