Nathan Annis – Director-Investor Relations Jim Snee – Chairman, President and Chief Executive Officer Jim Sheehan – Senior Vice President and Chief Financial Officer

Farha Aslam – Stephens, Inc. Adam Samuelson – Goldman Sachs Rupesh Parikh – Oppenheimer David Carlson – KeyBanc Eric Larson – Buckingham Research Group Ken Zaslow – Bank of Montreal Robert Moskow – Credit Suisse Jeremy Scott – Mizuho Akshay Jagdale – Jefferies

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Hormel Foods’ Fourth Quarter 2017 Earnings Release Conference Call. At this time, all participants are in a listen-only mode. As a reminder, this conference is being recorded Tuesday, November 21, 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 fourth 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, Chairman of the Board, President and Chief Executive Officer; and Jim Sheehan, Senior Vice President and Chief Financial Officer. Jim Snee will provide a review of each segment's performance for the quarter, and our outlook for fiscal 2018. Jim Sheehan will provide detailed financial results for the quarter, and further assumptions relating to our 2018 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 888-394-8218 and the access code is 5906948. It will also be posted to our website and archived for one year. Before we get started, I need to reference the Safe Harbor statement. Some of the comments made today will be forward-looking. And actual results may differ materially from those expressed in or implied by the statements we will be making. Please refer to Pages 32 through 39 in the company's Form 10-Q for the quarter ended July 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 divestitures of Farmer John and Diamond Crystal Brands, the acquisition of Justin's Ceratti and Fontanini, and the impact of a 53rd week in 2016. 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 organic net sales and organic volume. I will now turn the call over to Jim Snee.

Thank you, Nathan. Good morning everyone. We are pleased to announce our full year and fourth quarter results. For the year three of our five segments Grocery Products, Refrigerated Foods and International, delivered record earnings in spite of one last week than 2016. These three segments also delivered exceptionally strong organic sales growth. The growth in these segments offset declines at Jennie-O Turkey Store and Specialty Foods, allowing the total company to achieve organic volume and sales growth in 2017. In spite of a volatile commodity market environment, we delivered a quarter of strong organic volume and sales growth. Fourth quarter earnings per share was $0.41 in line with our most recent guidance. The fourth quarter was marked by many bright spots, Grocery Products delivered excellent earnings growth, our Grocery Products team continues to do an outstanding job growing iconic brands in the center store such as SPAM and Dinty Moore, while simultaneously capitalizing on pockets of growth and dynamic on trend categories with brands like Wholly Guacamole and Herdez. SPAM was a strong contributor to international sales growth in addition to the inclusion of the Ceratti business for our international team. Our China business experienced strong sales and earnings from SKIPPY peanut butter and our branded meat products. The new Jiaxing client is producing and shipping products while the Shanghai facility has stopped production. Our current manufacturing operations in China now include Beijing, Jiaxing and our SKIPPY plant in Weifang. Refrigerated Foods delivered results in line with our expectations. Organic sales growth was driven by food service sales of Hormel BACON 1, fully cooked bacon and Hormel Pepperoni. In addition to retail sales of BLACK LABEL bacon, NATURAL CHOICE products and CURE 01hams. Earnings in Refrigerated Foods were down due to the divestiture of Farmer John and favorable markets last year. The story of Jenny-O Turkey Store is very similar to what we communicated to you on the third quarter call. The Turkey market continues to be in an oversupply situation. Lower whole bird and commodity pricing was the key driver to lower sales and earnings this quarter. In spite of these difficult market conditions, Jennie-O Lean Ground Turkey continues to show growth and take share from ground beef. The results from specialty products are disappointing and driven by lower sales of Muscle Milk ready-to-drink protein beverages in the convenience store channel. The new leadership team at CytoSport is making the necessary adjustments to gain back ground from the setback they had this year. One key theme from this year is the impact record input prices had on our business. For some markets such as bellies and beef trim prices increased rapidly, but also decreased rapidly. Other markets such as Turkey breast dropped further and faster than anticipated and remain at depressed levels. Our sales and marketing teams continue to be diligent in their assessments and response to the cost volatility while finding ways to mitigate it. Overall, this year has been challenging and did not meet the expectations we set for ourselves at the beginning of the year. However, I cannot emphasize enough the importance of the intentional balance that we create in all areas of our business. Even with the disappointing year we had in the specialty foods and Jennie-O Turkey Store, we still delivered record operating margin, record operating cash flow, returned a record amount of cash back to shareholders and increased our cash balance. Looking to 2018 we will continue to follow our path forward that I laid out at our Investor Day in June. First, we’ll continue to evolve to a broader food company. The Columbus acquisition broadens our portfolio as we expand into a total deli provider and enhance our position in this advantage growth space. Second, expand and accelerate food service with the acquisition of Fontanini we will continue to aggressively grow our competitively advantage food service business. Third, become a more global food company. We are excited for the Ceratti acquisition in Brazil and our new plant in China. Both strategic investments will allow international to deliver above average growth this year. Fourth, reduce volatility and increase balance. We continue to increase the sales of value added products as a percentage of our total sales and we've complemented that growth with the acquisitions of purely value added businesses such as Fontanini, Ceratti and Columbus. Fifth, divest non-strategic assets. We will continue to take a hard look at all underperforming assets and if necessary make the difficult decisions required to ensure we are delivering shareholder value. And finally, modernizing our supply chain. Today we announced a reorganization of our supply chain. Glenn Leitch, who led Jennie-O Turkey Store to outstanding growth for the past seven years will now become Executive Vice President of Supply Chain. Glenn will be responsible for the entire supply chain from procurement to shipment. I would refer you to the separate press release for all the other details related to the reorganization. Overall, headwinds to our outlook in two 2018 include volatile commodity markets, a slower than expected recovery in the turkey industry and uncertainty in the hog and pork markets. The tailwinds in our business are clear. In addition to the solid fundamentals that will provide stronger organic growth, we have three new strategic acquisitions, numerous strategic investments and value added capacity and an innovation pipeline full of exciting new products. Our focus on innovation has never been stronger as evidenced by the substantial progress we made towards our 15% innovation by 2020 goal. As of the end of 2017, 14% of our total company sales came from products innovated in the last five years. Key products contributing to this growth include BACON 1, SKIPPY®PB BITES and HERDEZ guacamole salsa. Our current pipeline of new products is deep and our innovation teams are thinking of new and interesting ways to get products to the market faster, with more scale and in a more cost efficient manner. The headline for 2018 will read strong value-added growth and strategic acquisitions more than offset commodity headwinds. Looking at the segments for 2018, we expect Jennie-O Turkey Store to continue to navigate difficult industry conditions, while the remaining segments will provide earnings growth. We expect modest earnings declines for the full year at Jennie-O Turkey Store. Earnings decreases in the first half will not be fully offset by increases in the back half as turkey market moves towards a slow recovery. We expect continued value added sales and volume growth led by Lean Ground Turkey, Oven Ready products and Turkey Burgers. We plan to be back on air with the Make The Switch media campaign in 2018. Despite the disparity of views in the hog industry, the fundamentals of refrigerated food have never been better. While we anticipate a reduction in the commodity profits and refrigerated foods we expect continued growth in our value added businesses to more than offset the declines. Again this year, we expect the Hormel food service team to deliver industry leading results and the addition of Fontanini has put them in a great position to continue that trend. We also expect a solid year of growth from meat products. Once finalized, the acquisition of Columbus will help Refrigerated Foods deliver earnings growth in 2018. This morning we also announced a union of the grocery products and specialty foods segments. Both organizations sell shelf-stable products, have a focus on the food, drug, mass and club channels; and are charged with managing CPG brands. Luis Marconi who currently leads Grocery Products will continue to lead this segment. Combined this segment will be a model for how to manage iconic brands such as SPAM and SKIPPY while nurturing the growth of fast growing franchises like Wholly Guacamole, Justin's and CytoSport. Over time, consolidating these two segments will deliver revenue and cost synergies in all aspects of the business, while continuing to deliver industry leading growth. For 2018 specifically, we expect sales and earnings growth to be driven by our MegaMex line of products, Skippy and Justin's nut butters, as well as improvement in our CytoSport business. International will have a strong year benefiting from the acquisition of Ceratti in addition to strong results from our China business. After taking into account all these factors we are setting our fiscal 2018 sales guidance at $9.4 billion to $9.8 billion and our earnings per share guidance at a $1.60 to a $1.70 per share. This guidance excludes the Columbus acquisition. Consistent with the acquisition announcement, we expect Columbus to be $0.02 to $0.03 accretive to earnings in 2018. I'm excited to close the Columbus acquisition and start the consolidation of our deli businesses. We expect to close the deal in December. Our first quarter comparison will be a difficult one as we annualized this divestiture of the Farmer John business and continue to manage through the oversupply in the turkey industry. Our planned show sales and earnings growth weighted towards the second half of the year aided by acquisitions, innovation and cost reductions and improvements in the turkey market. At this time I will turn the call over to Jim Sheehan to discuss the financial information relating to the quarter and key assumptions for 2018.

Thank you Jim. Good morning everyone. Volume for the fourth quarter was 1.3 billion pounds, a 10% decrease, compared to last year. Organic volume increased 2%. Sales for the fourth quarter were $2.5 billion a 5% decrease. Organic net sales increased 5%. Net earnings for the fourth quarter were $218 million, down 11% compared to last year. General corporate expenses were lower due to the focus on strategic cost management and lower employee related expenses. Advertising expense was $30 million compared to $55 million in 2016. We plan to increase advertising by 20% in 2018. Excluding advertising, selling, general and administrative expenses were 6.6% of sales, compared to 7.2% of sales last year. Deal cost associated with the Ceratti and Fontanini acquisitions were approximately $0.01 per share in the fourth quarter. Operating margins were 13.2%, a 70 basis point decrease, compared to last year. For the full year, operating margins were 14%, 10 basis points higher than 2016. We are maintaining our goal to be in the top quartile of our peer group in operating margins by 2020. Today the top quartile trial range is 16% to 20%. We plan to attain this goal through a focus on strategic cost management, acquisitions, innovation and by investing capital into high margin products such as BACON 1 and SPAM production in China. Our effective tax rate was 33.8%, compared to 33.1% last year. In 2018 we are expecting our full year tax rate to be between 32.3% and 33.3%. Starting in the first quarter, we will adopt the new accounting standards related to stock compensation. This is expected to benefit our effective tax rate in 2018 by approximately 100 basis points and increase earnings per share by approximately $0.02. The adoption of the standard will increase quarterly tax rate volatility. We generated record cash flow from operations of $499 million, up 34% from $371 million last year. The increase was primarily related to decreases in working capital. Capital expenditures for the quarter totaled $103 million, compared to $90 million last year. We expect capital expenditures to be approximately $425 million in 2018. The higher level of capital is driven by the investment into additional capacity for high-margin products and projects to improve manufacturing efficiencies. They include the expansion of baking capacity, modernization of the Austin plant and replacement of the Melrose plant. We paid our 357th consecutive quarterly dividend effective August 15, at an annual rate of $0.68 per share. This morning we also announced a 10% increase to our dividend. The effective annual rate will be $0.75 per share. This is our 52nd consecutive year we have increased the dividend and the 9th consecutive year we have increased the dividend by a double digit rate. We repaid the debt associated with the Fontanini and Ceratti acquisition ending the year with $250 million in long-term debt, unchanged from 2016. After the Columbus transaction closes we expect our total debt to be approximately $1 billion. We remain in a strong financial position to fund any other capital needs. We did not repurchase stock in this quarter. We will continue to repurchase stock to set dilution from option exercises based on our internal evaluation of the stock. Input cost for the quarter were generally higher with the exception of the turkey markets. Hog prices in the fourth quarter were a 11% higher than last year. Prices last year reach multi-year lows. As Jim mentioned, there are conflicting viewpoints on the hog and pork industry. Hog price forecasts for calendar 2018 vary from high-single-digit decreases to mid-single-digit increases. Our expectation is for a low-single-digit increase in calendar year 2018. We expect earnings pressure in Refrigerated Foods during the first quarter due to the high cost compared to the unusually low cost last year. We continue to focus on three factors, domestic demand, export demand and industry capacity utilization. With the consumer trends moving towards increased protein consumption domestic demand remains very strong. The USDA cut out was 5% higher than last year for the fourth quarter. Export demand continues to be strong the USDA forecast for exports to be up 7% in 2017 and up another 6% in 2018. Hog supplies are expected to increase 3% to 4% next year. We continue to believe hog supplies are well-matched to industry capacity over the long-term. However, we do expect short term volatility depended on the progress of the new plants ramping it up to full production. We continue to assess the industry conditions and will make the necessary changes to ensure we are sourcing pork for our value added products at the lowest possible cost. In 2017 our commodity profits were slightly above average based on our market assumptions we expect commodity profits to be moderately below average in 2018. In 2018 we intend to reduce our hog harvest capacity by approximately 4%. If market conditions change we have the flexibility to adjust harvest levels. Belly prices remain volatile. Markets declined in the fourth quarter, but we're 25% higher than last year. We expect belly prices to remain volatile and in line with 2017. 72% pork trim prices were 15% above last year, we expect trim markets to be flat to 2017. 50% trim was 25% higher for the quarter. We expect beef prices to be flat to 2017 but higher in the first quarter. Beef costs we're lower compared to last year, we expect beef cost to be flat to last year. Turkey commodity prices remain at seven-year lows. Breast meat prices were 28% below last year. We have not seen the reduction to pull placements required to alleviate the oversupply condition. Cold storage remains that elevated levels. Turkey breast inventories are 17% above last year, while whole birds were 23% above last year. Based on the lack of meaningful production declines at high levels of inventory, we do not expect material changes in markets until the back half of the year. Our expectation is Jennie-O first half profits will be below 2017. We have made good initial progress on the financial strategy I laid out at Investor Day. These include reducing our general corporate expenses, improving our cash cycle and leveraging our balance sheet for growth. At this time I'll turn the call over to the operator for the portion of the call.

Hi good morning.

Good morning Farha.

Can you talk about Glenn Leitch's new role at the company? And how you look at your production facilities right now? And in particular, how you expect the Chinese plant to benefit earnings for next year?

Sure. So let's start with the new supply chain organization. What this is going to do for us is it's really going to give us better alignment across our entire organization. Today we have our operations that exist in our business units. And I would say that they're probably a bit fragmented. They're very successful but a bit fragmented, which really it inherently allows for duplications and inefficiencies. And so we believe that having this alignment across the organization and getting the structure and process right will allow us to become more cost effective, enhance our speed to market and really make us more agile over time, as we've – we're facing ever-changing, very dynamic market conditions. S I mean we believe this is a great move for our organization, it's consistent, very thoughtful with how we've been talking about our business and the needs to do this. In regards to China the new facility is going to help us in a couple of ways. And we were at capacity on a number of different lines because of the successful business we have in the food service segment. The other part that is going to do when it's more of a slower build is for the first time ever, we have in-country production of SPAM. And so when now that line is up and running, we've already seen some nice early success and are rapidly regaining distribution because we have been in-market with that product before. But really feel like not only operationally but structurally, we are set of for long-term success in China.

That’s helpful. And just as a follow-up, you highlighted variable commodity markets in 2018. Could you talk about Hormel's ability and experience to price for those fluctuations? And how retailers and consumers are accepting those prices?

Sure. I think we've demonstrated a track record of success when it comes to dealing with price increases. And a lot of that has to do with the brand positioning, delivering on the brand promise, but then also being a brand leader. And so given the strong brand presence that we have across our organization with so many number one and number two brands, we are able to successfully get those through. I would not say that it's easy, I mean, we take all price increases very seriously, and we work with all of our retail customers to make sure that we have got the best outcome for both of us. The other thing I would say, Farhat, is clearly, we understand the data and the insights around price elasticity and built that into our modeling as well. So I feel like we're pretty sophisticated and successful in that area.

That’s helpful. Thank you.

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

Yes thanks. Good morning everyone.

Hi Adam.

So I guess maybe some clarifying questions on the guidance where you laid out 160, 170 range. From the Fontanini and Ceratti deals there’s $0.04 to $0.05 of accretion. Do you think in the prepared remarks you alluded to a $0.05 tailwind on tax from the accounting change. And in the International segment, you should have the new plant up and running. And in fiscal 2017 you are absorbing cost as that started up and had some construction delays. And I guess, maybe there's a bit high accrual for incentive comp in the 2018 outlook, but I guess, if I put those kind of discrete factors to the side, I'm at the middle to upper end of your range on an organic basis for profit. And so is that the right characterization that the sum of grocery, refrigerated, Jennie-O and specialty profits are kind of in the middle to upper part of your range, flat net, am I doing that math right?

Yes, Adam you are. I mean, I think, if we go back to the headline I described in my comments is that the growth in our value-added business is going to offset some of the commodity volatility that we expect. And so if you go around really the business units, and I'll, – I mean, we have merged Grocery Products and specialty together, but just to help you with some clarity in that area, I mean, Grocery Products is going to be in line with the growth expectations that we have for that business. And quite frankly, specialty will have the same growth algorithm that we've talked about at CytoSport. We expect a return to growth in CytoSport. Refrigerated Foods is going to have low-single-digit growth in both sales and earnings. And International, you have assessed properly with strong double-digit growth and then John's will have low-single digit sales growth but really down mid-single digit from an earnings perspective because of the market conditions. So I think your rollup is fairly accurate getting to that range.

Okay. And then so maybe putting some finer point on refrigerated and Jennie-O, is there any way to maybe dimensionalize kind of the range of outcomes as you think of the key variables as you sit here today, is it for Parker margins for refrigerated, is it belly price volatility? And then in Jennie-O, kind of some of the supply factors that you would be looking at to make for a better, stronger, I presume, second half is probably the bigger I'd note at this plant.

Certainly. Good morning Adam, this is Jim Sheehan. I’ll talk a talk about some of the variables. The first thing is that there are very differing views about what's going to happen in the pork industry. Hog prices – forecast for hog prices are everything from down high single digits to up mid-single digits. We think we have taken a realistic view and we've identified our model on low single digits for the outlook. Now what is involved in that is that we're going to – we expect to see some volatility. Volatility as these playups ramp. Now in the first quarter, the cost of hogs were at $57 so far. I think it's important to understand that the five-year average in the first quarter is $75. And if you exclude the impact of the PEDV, those costs were at $70. So they're still below historical levels. But we had unseasonably low hog cost in the first quarter of 2007 – part of 2016, excuse me. And so we expect that we will be up against that as we go into 2018. So we have an unfavorable comparison for the first quarter of 2018. On the turkey side, I think, we’ve tried to be clear on what we're watching. We're watching the poult placements and we're watching the inventory reports. So far, we're just not seen anything that would tell us that this – it's bottomed out yet. We believe that we're going to see market improvements in the back half of the year with some flattening of the conditions midyear, but really not much improvement until the end of the year. So depending on how those commodities work, we're trying to be very, very clear as to how we built our outlook and that should give you some insight as to what could change.

And Adam, I would add on, clearly, I mean, a lot of the industry, the turkey industry, is operating near breakeven. I mean, clearly, we are well above that range. We feel like we've done what we need to do and that we've cut production, and believe that the rest of the industry needs to do that as well. Quite frankly, we are a bit disappointed that we haven't seen that as of yet. So that’s on the commodity side of the business but we still feel very confident as I talked about our number of different items that we expect to grow, the value-added items that will grow, our Lean Ground Turkey business is very healthy, I'm showing good growth and then still taking share versus the beef market.

Okay, that’s all. Very helpful color. I’ll pass it on. Thanks.

And we'll go next to Rupesh Parikh from Oppenheimer.

Good morning and thanks for taking my questions.

Good morning.

So I wanted to touch on the competitive environment. I was curious what you guys are seeing right now from a private label perspective and also what you're seeing from some of the other brand players.

From a private label perspective, our belief is that it's pretty standard operating procedure. I mean, private label has been a competitor, have been in a lot of categories for extended period of time. And so we continue to focus on what we do best and that is building our number one and number two leading brands. If we do that and have leading brand positions, I mean, we'll be able to overcome any category challenge. So we don't see that it's escalated anymore than it has in the past. And I can say, we treat it like any other competitor and understand what it is that we have to do to be successful.

Okay great. And switching topics to e-commerce, can you remind us the size of the business currently? And then some of the key efforts that you expect going forward in this area?

Sure, Rupesh. For us it's still a very small piece of our business. We have made some strategic investments of this year, creating our digital investment group. And so we've got the right structure in place. We're focusing our efforts around not only digital marketing, but e-commerce. And so we're not quite where we need to be, but believe that we're on the right track. We have the right structure and we'll get there with the team we have in place.

Okay great. Thank you.

We'll go next to David Carlson with KeyBanc.

Thanks for taking the questions. With the union of the Specialty Foods and Grocery Products segments, it becomes a little bit more difficult to gauge the progress of the sales turnaround efforts of MUSCLE MILK by looking at the Specialty Foods segment on the standalone basis. So what give you guys confidence that the issues with CytoSport will start to improve in the latter half of the year? And what else might be required in the form of ongoing investment and sales turnaround efforts. And I've got a follow-up.

Sure, thanks, David. I mean, the one thing we want to be clear about is, I mean, we will continue to update you on our progress at CytoSport. It's a very important part of our portfolio and we want to make sure you understand the progress that we're making in that business. We're still rebounding from the impact to the recall we described to you last quarter, where we saw, obviously, we were off shelves, saw some increased competitive activity and we're working, continue to work to get pricing in our assortment correct. I mean, our new leadership team, in addition to working on pricing and assortment, is focused on the consumer and making sure that we're focused on the key attributes of our product offering. And for us, as we head into 2017, a key differentiator is we have very strong alignment with our strategic distribution partner, Pepsi. And working closely with them we’ve made this, they have made this a top priority for 2018. We'll continue to make the necessary advertising investments in the business but having it at the top of their priority list is really an important part of the formula as well. So that's why we're optimistic heading into 2018 for CytoSport.

That’s a great answer. With respect to the pricing actions you guys took during the fiscal fourth, can you gives us just a little bit more clarity on exactly when those prices begin to have a positive impact on your P&L? And are any – with so many inputs seeming to be pretty volatile over the last couple of quarters, are there any other pricing actions that are in the process of being implemented?

Yes so the fourth quarter played out just like we told you on the third quarter the timing varied by category, but a broad statement, they took hold in the 11th period and that's really when we started to expect or experience the benefit. And what I would tell you is I talked earlier about some of price elasticity studies that we're doing to make sure we understand the impact that we've exceeded a lot of the pricing study expectations that we had when we took the price increases, obviously a very good sign. We do have some price increases in place for Q1 in our Grocery Products line with our Mary Kitchen corned beef hash and Dinty Moore Beef Stew.

Thank you for the time.

Yes.

We'll go next to Eric Larson with Buckingham Research Group.

Yes good morning all. And happy Thanks Giving.

Same to you Eric.

Just two – one question on pricing in the Grocery Products division. I know that you took some pricing, I believe, midyear last year in fiscal 2017 to offset some of the higher belly and both the pork and beef trim costs. Could you reiterate what the – kind of the timing of that was? And fiscal 2018 should benefit, I would assume at least for the first half from that. Will that be correct?

Yes so Eric so let’s – may be we’ll just kind of recap what we did in pricing in 2017. So in Refrigerated Foods, midyear, we had some pepperoni price increases as a result of the run-up in the beef trim market. We also saw an early run-up in the belly market which caused us to increase some bacon pricing. So that would have been Refrigerated Foods in the mid-part of the year that you referenced. And then as we got to the fourth quarter, we had another run-up on belly prices, so bacon was addressed again. And then we did have some other Grocery Products increases, chili and guacamole and peanut, butter in the fourth quarter.

Okay good. Thank you. That helps. I know there was a lot of activity there, so I just wanted to make sure I understood that. And then just one other follow-up question here, Jim the kind of surprised me that the turkey market is still as depressed as it is. I think, we're about nine months sort of into kind of a lower profitability market and it's normally about a nine-months to 12-month cycle so it seems to be going on longer than normal. Is there something specific that's going on per se that – is there a change in why we haven't seen the start of a rebound in that turkey business yet?

We have talked about the rebound being more of a 12-month to 18-month cycle, Eric. And so we would expect that we would have seen some lower bulk placements by this point. But I think one of the things that we need to consider is coming out of AI, that we've got a lot of producers who are perhaps awaiting the next outbreak. And so that supply side continues to go, nobody is willing to give up on their supply quite yet. The other thing I would point you to is that even though in the midst of AI, there were supply issues, I mean, there were some record profitability. And so you have some probably better-than-average capitalized operators that could, I mean, be holding their breath, so to speak, a little longer. And I mean, we'll see. We're not quite where we think we need to be yet, but like I said earlier, we have cut our production. We're disappointed that we haven't seen the rest of the industry follow suit.

And we'll go next to Ken Zaslow with Bank of Montreal.

Hi good morning everyone.

Hi Ken.

Just going through – or kind of quantify the buckets of cost savings because, now, at this point, you have acquisitions, you have the combination of Grocery and Specialty, you have the supply chain savings, you have China and I believe that you have still corporate expenses. Can we bucket them in terms of kind of giving us both the actual numbers or kind of figure out how much it is? And how long it will go for, so we can kind of contextualize this beside – bringing from an abstract level to actually something to kind of bring it down to my level?

Sure, that’s a great question Ken. And I mean, I would tell you that we've had a number of different initiatives across the organization and we've seen some of the benefits. But part of this whole supply chain alignment is to make sure that we have our focus on getting the right structure and process in place. And so today, we're not in a position to offer you those buckets. I think from our perspective, we're starting with this supply chain organization, today it was just announced. We've got to get the structure in place, so that we have better alignment across the organization. I think, on one hand, we've done – always done a good job of focusing our things from the bottom-up continuous improvement. But on the other hand, I mean, it's just time for us to take a more proactive top-down approach and we need to aggregate what those projects are, what the buckets are, what the savings are. So it's early in the process, but we certainly – to have had benefit, but our focus today is getting the structure and process in place.

Will there be – I mean how long will this go on? Any sort of, and this will be my follow-up so I won't ask anymore, but to me, it just seems like – will this go on for three years? Is there some sort of plan that this is going to reduce cost structure? And again, there's five or six different plans out there and you guys are definitely keeping busy, I'm just trying to figure out what is the time line and the magnitude of this? Are we talking about 100 basis points of margin? Are we talking about 400 basis points of margin? Are we talking about over a three-year period? Are we talking about over a five-year period? Just some sort of – something to grasp on would be helpful? It seems like you are doing a lot.

Yes we are doing a lot, we're doing a lot of good things. I mean, this is not going to be a one-hit wonder. I mean, this is going to be an ongoing multiyear approach, but the fact is the big driver around our supply chain is it's just announced today. And so we do have to get the structure, the process in place because, I mean, we know that with a fragmented supply chain, it inherently allows for the duplications and inefficiencies I talked about earlier. So this is going to be ongoing. It's not a one-year wonder, but again, we've got to get the organization in place, up and running so that the focus can be on the process.

And similar for the combination of the Specialty Business as well, is that also a cost-savings initiative?

Yes and this is Jim Sheehan and I would say that the one thing I'd disagree is that there's multiple plants. There's really one strategy around managing our costs. We're really taking this top-down approach that Jim has talked about. So we're setting the standards, we're setting the goals, we're setting the expectations at a very high level. So yes, the combination of Grocery Products and Specialty is a part of the strategy that Jim laid out all the way back to Investor Day about improving our supply chain. So it is engaging every level of the staff, but it is being driven from the top. The other thing is that I'd tell you, Ken, is that it's in the early stages and I think you've seen some of the results already. You could look at the financial statements and see where we've taken reductions and costs out of the staff, out of the expenses. But would we get into the broader levels, supply chain, how we go-to-market, that's when you'll start to see the bigger savings. As Jim said, I look at this and this is not well defined, but I look at this as probably a four-year project and then it's restructuring the way that we look at things. So there will be a savings that will go on well beyond this year.

And Ken, going back to your question around Grocery Products and Specialty Foods, I mean, just focus on the fact that there's a lot of shared resources in those businesses both from an operational and support perspective. They operate in similar channels. The brand or the business management is very similar. And so again, it goes back to the alignment and utilization of resources from a cost side. And then as I mentioned in my comments, over time, we think that there'll be some revenue synergies as well. So probably doesn't get you where you want to be, but I think understand it's early and this is a high priority for the organization.

I appreciate it. Thank you guys.

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

Hi I think Ken did his best on the savings question, but I've got to say that I'm not used to seeing big announcements like this without some sort of restructuring charge and restructuring savings kind of quantification and maybe that's just because – maybe four-year time frame, Jim and Jim, I'm just not used to that and I'm wondering why did you consider – or why did you choose to announce it this way? Is it just because it's too soon and we're going to get something in a few months? Or is it just the nature of this is we're going to get the process right and then we're going to get the savings as we go along?

Robert I think your latter comment is spot on. For us, this goes back to our need to optimize the supply chain. I mean, if we think about what we have become over time in terms of the number of production facilities that we have, the number of items, the number of supply ingredients, the number of co-packers that we now utilize, those have all been very thoughtful additions to support our business over time. But I mean, we just need to get the organization aligned because it is somewhat fragmented today. And so it's exactly what you said, is the focus is getting the structure and the process in place because it doesn't exist in an aligned manner today. So in terms of major, I'll say, restructuring charges, we don't have that on the horizon. From our perspective, we believe that this is going to be about alignment and the top-down approach, which is going to be a different way of thinking about this supply chain.

Okay. And I think, Jim Sheehan, you said that we should be able to see the administrative cost that came out in the quarter. Can you help us quantify exactly how much it is though because there’s a lot of moving parts here including advertising down?

Yeah, advertising is down $25 million. So that would be, out of the $50 billion that’s down in SG&A, $25 million of it is advertising. There are other changes, but it has created a reduction in expenses already in 2017. And as Jim said, we’ve been really focused on getting the structure right and it will continue to progress as we go into 2018.

Hey, Rob, the other thing I would remind you of is some of those general corporate expenses, we have made investments back in our business, one of the earlier callers had a question around our digital efforts. So I mean, we’ve been able to fund some strategic investments with the savings we achieved also.

But you’re comparing us to 14-week period a year ago. Is SG&A kind of unrelated to the extra week? Or is there a relationship between those – would SG&A be higher on a 14-week period a year ago?

It has a minor impact.

Minor impact.

Minor impact.

And can I ask a question about bacon specifically. You’ve been raising price – you’ve raised prices twice, it seems like the whole category raised prices. But then belly prices started falling like literally the day after you talked about it on the last earnings call. So do you have any insight as to what the category is going to do next in response to the falling belly prices?

Well, I mean, it did just what you described. I mean, after we talked about it, it did decrease. But as of late, we’ve seen some increases. We’ve seen the market going back up. And so we’ve – in Jim Sheehan’s comments, we try to give you the outlook as to what we think the belly market is going to do. But I mean, it’s been a very volatile market, there’s no doubt about it. And that’s, I mean, we’re watching it closely. I mean, we’re pulling all available levers and of course working closely with retailers to make sure that we’ve got a mutually beneficial outcome.

Got it. All right, thank you.

You’re welcome.

And we’ll go to Jeremy Scott with Mizuho.

Hi, good morning.

Hi, Jeremy.

Hi, Jeremy.

Just to square up the last 10 minutes or so. You still have that 16% to 20% margin target by 2020 and so that would bring you to about a three-year period, and would I have to – I assume that – can I bucket this into the cost-led realignment of the supply chain; number two, the organic recovery of turkey and the value-add portion of Refrigerated Foods; and then third, M&A? And how would you piece each – how would you apportion each of those as you move from 14% to the bottom end of that range?

Yeah, Jeremy, I mean, we think about it in perhaps a slightly different way. As we look at our business, I mean, obviously, we know that we’re competing in a number of advantaged areas. That will allow us to continue to grow the top line and so we talked about our Mexican portfolio, our foodservice business, what’s happening with SKIPPY and peanut butter – or SKIPPY and Justin’s in the nut butters category, our International business and of course what will be coming with the acquisition of Columbus. That is a going to support, obviously, the growth of the top line, a very strong focus on innovation. I referenced in my comments the great progress that we’ve made against our 15% by 2020 goal since we’re now at 14% and of course a lot of that is driven by the great work we do with consumer and operator insights. We know that we’re going to continue to be good stewards of our capital, invest for growth whether it’s internal, our value-added expansions for Dold and dry sausage, the accretive acquisitions that we’re making. And then, as you described, I mean, some of the efficiencies that we need to continue to gain and the supply chain structure, the supply chain organization, is going to be a part of that journey to get us to that margin goal.

Got it. And just a follow up on turkey and the basis of the recovery shape that you’re expecting in 2018. Do beef supplies need to thin out for JOTS to truly recover?

Now we’re looking this. We’re at this looking at this right now as purely a turkey issue. This is our own industry issue and we need to make sure that others are following suit to get us where we need to be. But I would tell you, if we think about some of the value-added items, our lean ground turkey continues to take share from the beef category. So I mean, we’re making progress on the value-added side. This really is a supply chain, commodity-driven issue.

Got it. And just quickly, what are you expecting for full year interest expense?

About $16 million.

Got it. Thank you.

And that obviously takes into account the Columbus acquisition.

Right, thanks.

Yes.

We’ll go next to Akshay Jagdale with Jefferies.

Hi, good morning. Thank you for taking the question. I wanted to ask about the CapEx, and I only have my model going back to fiscal 2000, so bear with me. But I mean, this is, by far, the highest CapEx rate percentage of sales, however, you want to look at it. So can you give us a little more color on what’s maintenance and what the other buckets are? I mean, it’s good to see companies getting more and more aggressive with the balance sheet and allocating cash. So maybe you can just give us some buckets and maybe talk about the broader sort of balance sheet strategy, right? That would be helpful.

Certainly, good morning, Akshay. This is Jim Sheehan. We talk about – we’ve talked about the past that we’re probably looking at the range of $80 million to $100 million of maintenance in this year, which is in an unusual level. The CapEx that we’re discussing includes the bacon expansion at Dold, that’s $139 million project. It’s on the early stages, so we probably have another $100 million left as we look at it; the Melrose plant, there’s another $100 million that we have budgeted in 2018 to finish that project, $40 million in Austin; value-added capacities, those projects that are focused on various other high-margin products expanding the capacity make up about another $85 million of it. So is that helpful?

Yeah, super helpful. And just put it into sort of the broader context. Obviously, over the last several years, we have seen the company get more aggressive on M&A, which has been great, but you have kind of a good problem where you keep generating a ton of cash and I see this as a – the first time we’ve seen a pretty significant step-up in CapEx. So maybe you can just help us understand, should we expect this type of increase for the next couple of years? And related to the questions about the supply chain realignment, maybe over the next couple of years, you’re not investing in bacon and some of these plants, but maybe you need to invest some cash to generate those savings. So just, overall, like what is the right rate of CapEx over the next couple of years? And why now sort of a big pickup?

I will do my best here. The first thing that I would like to focus on is the discipline we have when we make an investment. And I think some have heard me say before that I look at investment of capital, the allocation of capital, between CapEx and M&A really being determined by the best use of the capital. You’re right, we’ve had a lot of acquisitions recently, $1.3 billion, but we continue to have a very strong cash flow. And the acquisitions are enhancing that cash flow. So from the standpoint of concern about the cash flow, we’re very confident about our cash flow. Part of our – part of the working capital that’s coming up this year or the CapEx requirement is just a matter of timing. If we would have started these projects a little bit earlier in the year, it would have been split on a more balanced basis between 2017 and 2018, but capital projects that are this large quite often have their own schedule. We do not see the $425 million as the new run rate, but as the business increases, to go back and to look at the historical spend, we’d probably understate it to some degree as we’ve done additional acquisitions, that’s going to increase the amount of maintenance, the amount of CapEx that’s required.

That’s helpful. And just one on Refrigerated Foods, if I may. So I don’t know if you broke this out, but maybe you can remind me again what the EBIT expectation for that segment is? I know you mentioned it, but I may have missed it. The reason I’m asking is I really would like you to maybe dissect that between what are the acquisitions adding, you know, in my estimate around $70 million from the one that you’ve already completed including synergies and then maybe another $25 million from the one you are about to close. But just trying to understand sort of how much of it is acquisition-related just so that we get a sense for the base business excluding acquisitions. What do you need to do to get to your guidance, right? That’s essentially what I’m trying to get at. Thank you.

Sure, Akshay. As you think about earnings for Refrigerated Foods, we’ve said we’re going to be low single digits in 2018. From an acquisition perspective, with the guidance that we’ve given in 2018, Fontanini will be $0.03 to $0.04. The full year impact of Farmer John will probably be $0.01. I mean the headline here again for Refrigerated – those were important factors, but the headline still really comes down to value added, being able to offset the decrease in some of the commodity profits. And so where we’re at with the Refrigerated Foods business is we believe it’s never been fundamentally stronger. And what we’re doing on the acquisition side only strengthens it. So that’s how we’re thinking about and how we’re modeling that to the low single-digit earnings for 2018.

And just one last one on that and I really appreciate you giving the incremental color on this. The commodity profits, there is a view, there is some concerns that you – your commodity profits represented a greater percentage of the total segment earnings over the last couple of years. I know you mentioned 2017 was modestly above the long-term average that you presented at Analyst Day. But just can you be a little bit more granular there because there is this view that if the pork processing commodity margins go from $30 a head on average over the last couple of years to $10 or 0, that there could be significant declines in your base business. That’s what we’re trying to get at. I mean you have obviously come out and said that that’s not going to – I mean that volatility doesn’t translate into your earnings, but I’m just trying to get a better sense of that. So if you could help on the commodity piece and what percentage of earnings it’s been, that would be super helpful. Thank you.

This is Jim Sheehan again. I guess, the first thing I’d want you to focus on is our acquisitions, none of which have a commodity component to them. So our acquisition strategy is reducing our dependence on those commodity – that commodity profitability. In 2017, our – we have talked about in Investor Day that it was about 15% of Refrigerated Foods, but the additional acquisitions will reduce that percentage because Fontanini, which is in our plan in right now and eventually Columbus will both push that percentage down. We’ve said that it’s going to be lower, moderately lower than last year.

And Akshay, I would point you to Nathan. I think you guys can have a conversation to follow up, if that’s okay.

Perfect, I will follow up. Thank you.

Thank you.

And that will conclude our question-and-answer session. I would like to turn the conference back over to Jim Snee for any additional or closing remarks.

Well, I want to thank all of you for joining us today. I want to offer my sincere appreciation to all of our inspired people who make inspired food each and every day. And I know that they will continue to challenge themselves in 2018 to hit the key results that we’ve set for ourselves going forward. I want to wish all of you a very happy Thanksgiving.

That does conclude today’s conference. We thank you for your participation. You may now disconnect.