Hormel Foods Corp. CEO JEFFREY M ETTINGER bought 10000 shares on 01-05-2009 at $31.56
(a) General Development of Business
Hormel Foods Corporation, a Delaware corporation (the Company), was founded by George A. Hormel in 1891 in Austin, Minnesota, as George A. Hormel & Company. The Company started as a processor of meat and food products and continues in this line of business. The Company name was changed to Hormel Foods Corporation on January 31, 1995. The Company is primarily engaged in the production of a variety of meat and food products and the marketing of those products throughout the United States and internationally. Although pork and turkey remain the major raw materials for its products, the Company has emphasized for several years the manufacturing and distribution of branded, value-added consumer items rather than the commodity fresh meat business. The Company has continually expanded its product portfolio through organic growth, new product development, and acquisitions.
In June 2008, the Company acquired Boca Grande Foods, Inc. (Boca Grande). Boca Grande manufactures, sells, and distributes liquid portion products and operates a facility in Duluth, Georgia.
Internationally, the Company markets its products through Hormel Foods International Corporation (HFIC), a wholly owned subsidiary. HFIC has a presence in the international marketplace through joint ventures and placement of personnel in strategic foreign locations such as Australia, Canada, China, Japan, and the Philippines. HFIC also has a global presence with minority positions in food companies in Mexico (Hormel Alimentos, 50% holding) and the Philippines (Purefoods-Hormel, 40% holding), and in a hog production and processing operation in Vietnam (San Miguel Purefoods (Vietnam) Co. Ltd., 49% holding).
The Company has not been involved in any bankruptcy, receivership, or similar proceedings during its history. Substantially all of the assets of the Company have been acquired in the ordinary course of business.
The Company had no significant change in the type of products produced or services rendered, or in the markets or methods of distribution since the beginning of the 2008 fiscal year.
The Company‚Äôs business is reported in five segments: Grocery Products, Refrigerated Foods, Jennie-O Turkey Store (JOTS), Specialty Foods, and All Other. Net sales to unaffiliated customers and operating profit, and the presentation of certain other financial information by segment, are reported in Note K of the Notes to Consolidated Financial Statements and in the Management‚Äôs Discussion and Analysis of Financial Condition and Results of Operations of the Annual Stockholder‚Äôs Report for the year ended October 26, 2008, incorporated herein by reference.
(c) Description of Business
Products and Distribution
The Company‚Äôs products primarily consist of meat and other food products. The meat products are sold fresh, frozen, cured, smoked, cooked, and canned.
Reporting of revenues from external customers is based on similarity of products, as the same or similar products are sold across multiple distribution channels such as retail, foodservice, or international. Revenues reported are based on financial information used to produce the Company‚Äôs general-purpose financial statements.
Perishable meat includes fresh meats, sausages, hams, wieners, and bacon (excluding JOTS products). The Poultry category is composed primarily of JOTS products. Shelf-stable includes canned luncheon meats, shelf-stable microwaveable entrees, stews, chilies, hash, meat spreads, flour and corn tortillas, salsas, tortilla chips, and other items that do not require refrigeration. The Other category primarily consists of nutritional food products and supplements, sugar and sugar substitutes, creamers, salt and pepper products, sauces and salad dressings, dessert and drink mixes, and industrial gelatin products.
During fiscal 2008, the Company expanded its value-added production capacity in several locations, including Browerville, Minnesota; Pelican Rapids, Minnesota; Tucker, Georgia; and Visalia, California. Additionally, construction began on a new production facility in Dubuque, Iowa, which will be used for production of canned items and the Hormel Compleats line of microwave meals. No other new products in fiscal 2008 required a material investment of the Company‚Äôs assets.
Domestically, the Company sells its products in all 50 states. The Company‚Äôs products are sold through its sales personnel, operating in assigned territories coordinated from sales offices located in most of the larger U.S. cities, as well as independent brokers and distributors. Dedicated sales teams also serve major retail customers and coordinate sales of both Grocery Products and Refrigerated Foods products. As of October 26, 2008, the Company had approximately 608 sales personnel engaged in selling its products. Distribution of products to customers is primarily by common carrier.
Through HFIC, the Company markets its products in various locations throughout the world. Some of the larger markets include Australia, Canada, China, England, Japan, Mexico, and Micronesia. The distribution of export sales to customers is by common carrier, while the China operations own and operate their own delivery system. The Company, through HFIC, has licensed companies to manufacture various Hormel products internationally on a royalty basis, with the primary licensees being Tulip International of Denmark and CJ Corporation of South Korea.
The Company has, for the past several years, been concentrating on processed branded products for consumers with year-round demand to minimize the seasonal variation experienced with commodity-type products. Pork continues to be the primary raw material for Company products. Although the live pork industry has evolved to large, vertically integrated, year-round confinement operations, and supply contracts have become prevalent in the industry, there is still a seasonal variation in the supply of fresh pork materials. The Company‚Äôs expanding line of processed items has reduced, but not eliminated, the sensitivity of Company results to raw material supply and price fluctuations.
The majority of the hogs harvested by the Company are purchased under supply contracts from producers located principally in Colorado, Idaho, Illinois, Iowa, Kansas, Minnesota, Nebraska, Oklahoma, South Dakota, Texas, Utah, Wisconsin, and Canada. The cost of hogs and the utilization of the Company‚Äôs facilities are affected by both the level and the methods of pork production in the United States. The movement toward year-round confinement operations which operate under supply agreements with processors has resulted in fewer hogs being available on the spot cash market. The Company, along with others in the industry, uses supply contracts to manage the effects of this trend and to ensure a stable supply of raw materials. The Company has converted the majority of its contracts to market-based formulas to better match input costs with customer pricing, and all contract costs are fully reflected in the Company‚Äôs reported financial statements. In fiscal 2008, the Company purchased 91 percent of its hogs under supply contracts. The Company also procures a portion of its hogs through farms that it either owns or operates in Arizona, California, Colorado, Kansas, and Wyoming.
In fiscal 2008, JOTS raised turkeys representing approximately 67 percent of the volume needed to meet its raw material requirements for whole bird and processed turkey products. Turkeys not sourced within the Company are contracted with independent turkey growers. JOTS‚Äô turkey-raising farms are located throughout Minnesota and Wisconsin.
Production costs in raising hogs and turkeys are subject primarily to fluctuations in feed grain prices and, to a lesser extent, fuel costs. To manage this risk, the Company periodically hedges its anticipated purchases of grain using futures contracts.
The Company has plants in Austin, Minnesota; Fremont, Nebraska; Vernon, California; and Beijing, China that harvest hogs for processing. Quality Pork Processors, Inc. of Dallas, Texas, operates the harvesting facility at Austin under a custom harvesting arrangement.
Facilities that produce and distribute manufactured items are located in Albert Lea, Minnesota; Algona, Iowa; Alma, Kansas; Ames, Iowa; Aurora, Illinois; Austin, Minnesota; Beloit, Wisconsin; Bondurant, Iowa; Bremen, Georgia; Browerville, Minnesota; Chino, California; Dayton, Ohio; Duluth, Georgia; Eldridge, Iowa; Ft. Dodge, Iowa; Fremont, Nebraska; Knoxville, Iowa; Lathrop, California; Long Prairie, Minnesota; Mitchellville, Iowa; Nevada, Iowa; New Berlin, Wisconsin; Osceola, Iowa; Perrysburg, Ohio; Quakertown, Pennsylvania; Rochelle, Illinois; San Leandro, California; Savannah, Georgia; Sparta, Wisconsin; St. Paul, Minnesota; Stockton, California; Tucker, Georgia; Turlock, California; Vernon, California; Visalia, California; Wichita, Kansas; Beijing, China; and Shanghai, China. Albert Lea Select Foods, Inc. of Dallas, Texas, operates the processing facility at Albert Lea under a custom manufacturing agreement. Company products are also custom manufactured by several other companies. The following are the Company‚Äôs larger custom manufacturers: Steuben Foods, Jamaica, New York; Lakeside Packing Company, Manitowoc, Wisconsin; Schroeder Milk, Maplewood, Minnesota; Reichel Foods, Rochester, Minnesota; Power Packaging, St. Charles, Illinois; and Tony Downs, St. James, Minnesota. Power Logistics, Inc., based in St. Charles, Illinois, operates distribution centers for the Company in Dayton, Ohio, and Osceola, Iowa.
The Company‚Äôs turkey harvest and processing operations are located in Barron, Wisconsin; Faribault, Minnesota; Melrose, Minnesota; Montevideo, Minnesota; Pelican Rapids, Minnesota; and Willmar, Minnesota.
Patents and Trademarks
There are numerous patents and trademarks that are important to the Company‚Äôs business. The Company holds 9 foreign and 49 U.S.-issued patents. Some of the trademarks are registered and some are not. Some of the more significant owned or licensed trademarks used in the Company‚Äôs segments are:
HORMEL, ALWAYS TENDER, AMERICAN CLASSICS, AUSTIN BLUES, BANGKOK PADANG, BLACK LABEL, BREAD READY, B√öFALO, CAF√Č H, CALIFORNIA NATURAL, CARAPELLI, CHI-CHI‚ÄôS, COMPLEATS, CURE 81, CUREMASTER, DAN‚ÄôS PRIZE, DI LUSSO, DINTY MOORE, DODGER DOGS, DO√ĎA MARIA, DUBUQUE, FARMER JOHN, FAST ‚ÄėN EASY, GRANDE GOURMET, HERB-OX, HERDEZ, HIBACHI GRILL, HOMELAND, HOUSE OF TSANG, JENNIE-O TURKEY STORE, KID‚ÄôS KITCHEN, LAYOUT, LITTLE SIZZLERS, LLOYD‚ÄôS, MAGNIFOODS, MANNY‚ÄôS, MARRAKESH EXPRESS, MARY KITCHEN, NATURAL CHOICE, NATURASELECT, OLD SMOKEHOUSE, PELOPONNESE, PILLOW PACK, POCO PAC, PREP CHEF, PREMORO, RANGE BRAND, RICO OLE‚Äô, ROSA GRANDE, SAAG‚ÄôS, SANDWICH MAKER, SAUCY BLUES, SPAM, SPAMTASTIC, STAGG, TEZZATA, THICK & EASY, VALLEY FRESH, and WRANGLERS.
The Company‚Äôs patents expire after a term that is typically 20 years from the date of filing, with earlier expiration possible based on the Company‚Äôs decision to pay required maintenance fees. As long as the Company intends to continue using its trademarks, they are renewed indefinitely.
Customers and Backlog Orders
During fiscal year 2008, sales to Wal-Mart Stores, Inc. (Wal-Mart) represented approximately 12 percent of the Company‚Äôs revenues (measured as gross sales less returns and allowances). Wal-Mart is a customer for all five segments of the Company. The five largest customers in each segment make up approximately the following percentage of segment sales: 47 percent of Grocery Products, 37 percent of Refrigerated Foods, 41 percent of JOTS, 38 percent of Specialty Foods, and 25 percent of All Other. The loss of one or more of the top customers in any of these segments could have a material adverse effect on the results of such segment. Backlog orders are not significant due to the perishable nature of a large portion of the products. Orders are accepted and shipped on a current basis.
The production and sale of meat and food products in the United States and internationally are highly competitive. The Company competes with manufacturers of pork and turkey products, as well as national and regional producers of other meat and protein sources, such as beef, chicken, and fish. The Company believes that its largest domestic competitors for its Refrigerated Foods segment in 2008 were Tyson Foods, Smithfield Foods, and Sara Lee Corporation; for its Grocery Products segment, ConAgra Foods, Pinnacle Foods, and Campbell Soup Co.; and for JOTS, Cargill, Inc. and Butterball, LLC.
All segments compete on the basis of price, product quality, brand identification, and customer service. Through aggressive marketing and strong quality assurance programs, the Company‚Äôs strategy is to provide higher quality products that possess strong brand recognition, which would then support higher value perceptions from customers.
The Company competes using this same strategy in international markets around the world.
Research and Development
Research and development continues to be a vital part of the Company‚Äôs strategy to extend existing brands and expand into new branded items. The expenditures for research and development for fiscal 2008, 2007, and 2006, were approximately $22,689,000, $21,475,000, and $18,631,000, respectively. There are 91 employees engaged in full time research and development, 46 in the area of improving existing products and 45 in developing new products.
As of October 26, 2008, the Company had approximately 19,100 active employees.
(d) Geographic Areas
Financial information about geographic areas, including total revenues attributed to the U.S. and all foreign countries in total for the last three fiscal years of the Company, is reported in Note K of the Notes to Consolidated Financial Statements of the Annual Stockholder‚Äôs Report for the year ended October 26, 2008, incorporated herein by reference.
(e) Available Information
The Company makes available, free of charge on its Web site at www.hormelfoods.com, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. These reports are accessible under the ‚ÄúInvestors‚ÄĚ caption of the Company‚Äôs Web site and are available as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission.
TERRELL K. CREWS 53 Executive Vice President, Chief Financial Officer and Vegetable Business CEO for Monsanto Company, an agricultural company, since September 2007; Executive Vice President and Chief Financial Officer from 2000 to 2007. Member of the Board of Trustees of Freed-Hardeman University, Henderson, Tennessee. 2007
JEFFREY M. ETTINGER 50 Chairman, President and Chief Executive Officer since November 21, 2006; President and Chief Executive Officer from January 1 to November 20, 2006; President and Chief Operating Officer from 2004 to 2006; Group Vice President from 2001 to 2004; Chief Executive Officer of Jennie-O Turkey Store, Inc. from 2003 to 2004. Member of the Board of Directors of the Ordway Center for the Performing Arts, St. Paul, Minnesota, Grocery 2004
MANAGEMENT DISCUSSION FOR LATEST QUARTER
CRITICAL ACCOUNTING POLICIES
Beginning in fiscal 2008, Hormel Foods Corporation (the Company) adopted the provisions of Financial Accounting Standards Board (FASB) Interpretation No. 48, ‚ÄúAccounting for Uncertainty in Income Taxes,‚ÄĚ an interpretation of FASB Statement No. 109 (FIN 48). In accordance with FIN 48, the Company recognizes a tax position in its financial statements when it is more likely than not that the position will be sustained upon examination, based on the technical merits of the position. That position is then measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. See further discussion regarding the impact of adopting FIN 48 in Note K of the Notes to Consolidated Financial Statements in this Form 10-Q.
There have been no other material changes in the Company‚Äôs Critical Accounting Policies, as disclosed in its Annual Report on Form 10-K for the year ended October 28, 2007.
RESULTS OF OPERATIONS
The Company is a processor of branded and unbranded food products for retail, foodservice, and fresh product customers. It operates in five segments as described in Note L of the Notes to Consolidated Financial Statements in this Form 10-Q.
The Company earned $.38 per diluted share in the third quarter of fiscal 2008, compared to $.41 per diluted share in the third quarter of fiscal 2007. Significant factors impacting the quarter were:
‚ÄĘ Net sales and tonnage growth was reported across all five segments of the Company.
‚ÄĘ Jennie-O Turkey Store segment profit decreased significantly due to continued higher grain and fuel related costs during the quarter.
‚ÄĘ Grocery Products reported a strong quarter driven by strong baseline sales in key brands.
‚ÄĘ Refrigerated Foods segment profit declined slightly as pricing advances were unable to fully recover higher input costs.
‚ÄĘ Specialty Foods experienced strong net sales and profit growth in all three operating segments.
‚ÄĘ Strong export sales drove increased results for the All Other segment.
‚ÄĘ A challenging investment environment generated significant declines in investment income compared to the prior year.
Net earnings for the third quarter of fiscal 2008 decreased 9.5 percent to $51,947 compared to $57,374 in the same quarter of 2007. Diluted earnings per share for the quarter decreased to $.38 from $.41 last year. Net earnings for the first nine months of 2008 increased 8.5 percent to $217,689 from $200,700 in 2007. Diluted earnings per share for the same period increased to $1.58 from $1.44 in the prior year.
Net sales for the third quarter of fiscal 2008 increased 10.4 percent to $1,678,142 from $1,520,005 in 2007. Tonnage increased 6.7 percent to 1,137 million lbs. for the third quarter compared to 1,066 million lbs. in the same quarter of last year. Net sales for the first nine months of fiscal 2008 increased 8.1 percent to $4,893,391 from $4,528,685 in the first nine months of fiscal 2007. Tonnage for the nine months increased 5.6 percent to 3,467 million lbs. compared to 3,284 million lbs in 2007. Tonnage growth for both the quarter and nine months has been driven by value-added sales growth and additional commodity meat sales. Net sales results also reflect the impact of pricing initiatives that have been pursued throughout the year in response to significantly higher input costs during fiscal 2008.
Net sales and tonnage comparisons for the quarter were positively impacted by the third quarter 2008 acquisition of Boca Grande Foods, Inc. (Boca Grande) and the fourth quarter 2007 acquisition of Burke Corporation (Burke), and year to date comparisons also benefited from the first quarter 2007 acquisition of Provena Foods Inc. (Provena). These acquisitions contributed an incremental $37,617 of net sales and 24.2 million lbs. of tonnage to the third quarter results, and $106,348 of net sales and 73.1 million lbs. of tonnage to the nine month results. Excluding the impact of these acquisitions, net sales and tonnage increased 7.9 percent and 4.4 percent, respectively, compared to the third quarter of fiscal 2007, and increased 5.7 percent and 3.3 percent, respectively, compared to the first nine months of last year.
Gross profit for the third quarter and nine months of fiscal 2008 was $345,694 and $1,124,352, respectively, compared to $323,381 and $1,028,704 for the same periods last year. Gross profit as a percentage of net sales decreased to 20.6 percent for the third quarter of fiscal 2008 from 21.3 percent in the same quarter of 2007. For the first nine months, this percentage has increased to 23.0 percent, slightly above 22.7 percent for the comparable period of the prior year. Continued higher feed input and fuel costs at our Jennie-O Turkey Store segment were a key factor contributing to the decline in margins for the third quarter compared to the prior year. An oversupply of turkey breast meat in the market also kept commodity pricing low and negatively impacted results. The Refrigerated Foods segment was also impacted by higher input costs that were not fully recovered through pricing actions. The combination of the existing turkey industry conditions described above and expected volatility in the pork complex are expected to continue to pressure margins in upcoming quarters.
Selling and delivery expenses for the third quarter and nine months of fiscal 2008 were $204,167 and $622,393, respectively, compared to $187,823 and $578,974 last year. This increase is primarily due to higher shipping and handling costs of $16,710 and $34,762 for the third quarter and first nine months of fiscal 2008 compared to the prior year. Selling and delivery expenses as a percentage of net sales decreased to 12.2 percent and 12.7 percent, respectively, for the third quarter and nine months of fiscal 2008, compared to 12.4 percent and 12.8 percent of net sales in the comparable periods of 2007. The percentage declines generally reflect the impact of pricing initiatives taken during 2008. The Company‚Äôs marketing investment for both the third quarter and nine months exceeded prior year levels due to on-going media campaigns supporting several key brands. Due to higher anticipated freight and warehousing costs and increased marketing expenses, selling and delivery expenses are expected to remain above the prior year for the remainder of fiscal 2008.
Administrative and general expenses were $47,737 and $135,837 for the third quarter and nine months of fiscal 2008, respectively, compared to $41,231 and $123,574 last year. As a percentage of net sales, administrative and general expenses for both the fiscal 2008 third quarter and nine months was 2.8 percent, compared to 2.7 percent for both the comparable quarter and nine months in fiscal 2007. The nine month increase reflects higher professional service expenses incurred during fiscal 2008. The Company expects administrative and general expenses to remain near current levels during the fourth quarter, and to approximate 2.8 percent of net sales for the 2008 fiscal year.
Equity in earnings of affiliates was $241 and $3,431 for the third quarter and nine months of fiscal 2008, respectively, compared to $1,212 and $2,084 last year. The decline for the quarter primarily reflects lower results from the Company‚Äôs 40.0 percent owned Philippine joint venture, Purefoods-Hormel Company, due to the impact of the weakening Philippine peso. For the nine months, notable gains were reported on the Company‚Äôs 49.0 percent owned joint venture, Carapelli USA, LLC, and the Company‚Äôs 49.0 percent owned joint venture, San Miguel Purefoods (Vietnam) Co. Ltd. Minority interests in the Company‚Äôs consolidated investments are also reflected in these figures, resulting in decreased earnings of $341 and $1,144 for the third quarter and first nine months, respectively, compared to the prior year.
The effective tax rate for the third quarter and first nine months of fiscal 2008 was 35.2 and 36.1 percent, respectively, compared to 36.4 and 36.1 percent for the comparable periods of fiscal 2007. The lower rate for the third quarter is primarily due to net favorable discrete items related to prior period audit settlements, foreign tax accruals, and various provision-to-return adjustments. The Company expects a full-year effective tax rate between 36.0 and 36.5 percent for fiscal 2008.
The Grocery Products segment consists primarily of the processing, marketing, and sale of shelf-stable food products sold predominantly in the retail market.
Grocery Products net sales increased 10.3 percent for the third quarter and 8.2 percent for the nine months compared to the comparable fiscal 2007 periods. Tonnage increased 9.5 percent for the quarter and 5.2 percent for the nine months compared to the prior year. Segment profit for Grocery Products increased 11.1 percent for the third quarter and 8.9 percent for the nine months compared to fiscal 2007.
Strong sales of key product lines drove the top-line results for Grocery Products. Hormel and Stagg chili both had notable gains over the prior year third quarter, driven by successful retail promotional programs and gains achieved over competitive brands. Net sales also improved for Dinty Moore stew, following the introduction of new Big Bowl microwave products and strong marketing support during the quarter. Increased sales of Hormel Compleats microwave meals over the prior year also contributed to the positive results. The overall net sales growth for Grocery Products also reflects the impact of pricing advances taken on several product lines throughout fiscal 2008.
The Grocery Products segment continued to experience cost pressures during the third quarter, particularly related to higher protein input costs, fuel, and other ingredients. These higher expenses are expected to continue into upcoming quarters, and additional pricing initiatives are planned for certain product lines in the fourth quarter to recover a portion of the cost increases.
The Refrigerated Foods segment includes the Hormel Refrigerated, Farmer John, and Dan‚Äôs Prize operating segments. This segment consists primarily of the processing, marketing, and sale of branded and unbranded pork and beef products for retail, foodservice, and fresh product customers. Results for the Hormel Refrigerated operating segment include the Precept Foods business which offers a variety of case-ready beef and pork products to retail customers. Precept Foods, LLC, is a 51 percent owned joint venture between Hormel Foods Corporation and Cargill Meat Solutions Corporation, a wholly-owned subsidiary of Cargill, Incorporated.
Net sales by the Refrigerated Foods segment increased 8.0 percent for the third quarter and 6.6 percent for the nine months of fiscal 2008, compared to the same periods of fiscal 2007. Tonnage increased 3.9 percent and 5.5 percent for the third quarter and nine months, respectively, compared to last year. Net sales and tonnage comparisons were positively impacted by the fourth quarter 2007 acquisition of Burke, and year to date comparisons also benefited from the first quarter 2007 acquisition of Provena. These acquisitions contributed an incremental $35,135 of net sales and 21.0 million lbs. of tonnage to the third quarter results and $103,866 of net sales and 69.9 million lbs. of tonnage to the nine month results. Excluding the impact of these acquisitions, net sales and tonnage increased 3.7 percent and 0.2 percent, respectively, compared to the third quarter of fiscal 2007, and increased 2.3 percent and 1.5 percent, respectively, compared to the first nine months of last year.
Segment profit for Refrigerated Foods decreased 1.2 percent and increased 25.9 percent for the third quarter and nine months, respectively, compared to the prior year. The Company processed 2,271,000 hogs during the third quarter, which was comparable to 2,265,000 hogs for the same period last year. Pork operating margins were strong, but the rapid increase in primal values experienced throughout the third quarter pressured margins in the segment‚Äôs value-added business units. Strong industry export demand contributed to the higher pork costs. The Meat Products and Foodservice units were unable to advance pricing quickly enough to fully recover their increased input costs. The Company expects hog markets in the fourth quarter of fiscal 2008 to exceed prior year levels, and Refrigerated Foods will continue to pursue pricing advances during the remainder of the fiscal year to mitigate a portion of the higher input costs.
Demand for value-added products remained strong during the quarter. The Meat Products business unit reported significant retail sales growth, particularly for DiLusso Deli Company products, Hormel pepperoni, and Hormel refrigerated entrees. The Foodservice unit continued to experience softness in the casual dining segment, but was able to partially offset that impact by increasing sales to other channels. Sales growth was noted on premium pork, Austin Blues BBQ, turkey, pork sausage, and economy hams.
Farmer John reported increased net sales compared to the third quarter of fiscal 2007, driven by strong fresh pork sales. However, segment profit decreased from the prior year, as retail margins were negatively impacted by higher raw material costs during the quarter. The on-going impact of higher grain markets also contributed to lower results for the Company‚Äôs hog production facilities, with feed cost per ton increasing approximately 36.0 percent in the quarter compared to fiscal 2007.
Dan‚Äôs Prize, the Company‚Äôs wholly owned marketer and seller of beef products, reported a net sales decline for the third quarter. This decrease reflected an on-going weaker demand for beef due to large supplies of competitive proteins maintained during fiscal 2008. Operating profit also declined compared to the prior year, as this business continued to struggle with tighter raw material supplies and increased input costs that were not fully recovered through pricing advances.
Jennie-O Turkey Store
The Jennie-O Turkey Store (JOTS) segment consists primarily of the processing, marketing, and sale of branded and unbranded turkey products for retail, foodservice, and fresh product customers.
JOTS net sales increased 11.5 percent for the third quarter and 8.3 percent for the first nine months versus the comparable periods of fiscal 2007. Tonnage increased 7.4 percent for the third quarter and 6.4 percent for the nine months, compared to fiscal 2007 results. Value-added net sales increased 6.1 percent despite a decline in tonnage, reflecting the benefit of on-going pricing initiatives. Significantly higher commodity meat sales also improved top-line results, as harvest volumes and livabilities have increased compared to prior year levels.
Segment profit for JOTS decreased 61.2 percent for the third quarter and 15.7 percent for the first nine months of fiscal 2008 compared to the prior year. Significantly higher feed and fuel input costs continued throughout the third quarter and were a key factor in the profit decline. On a combined basis, these costs increased approximately $52,700 compared to the fiscal 2007 third quarter. The Company‚Äôs hedging programs and additional price increases across the retail, foodservice, and deli units provided some benefit during the quarter, but were unable to fully offset the input cost increase. An excess supply of commodity turkey breast meat in the market also kept pricing at a low level during the third quarter, which further reduced profit results compared to the prior year.
Despite the challenging market conditions, JOTS was successful in growing value-added volume on certain product lines. Jennie-O Turkey Store turkey burgers, retail tray pack products, and marinated tenderloins all reported notable gains during the third quarter.
Although grain prices have moderated recently, they are expected to remain above fiscal 2007 levels for the remainder of the year. Both JOTS and the turkey industry will also have an excess breast meat supply entering the fourth quarter. The Company has been reducing turkey poult placements during the third quarter, and will evaluate whether further live production volume reductions are warranted. Production cuts are also anticipated from others in the industry, which may reduce supply during fiscal 2009, but the cuts are not expected to benefit operating results until existing inventories are utilized. Based on these factors, the Company expects profit results for JOTS to remain below prior year for the fourth quarter, and does not anticipate year over year earnings growth until the latter part of fiscal 2009.
The Specialty Foods segment includes the Diamond Crystal Brands (DCB), Century Foods International (CFI), and Hormel Specialty Products (HSP) operating segments. This segment consists of the packaging and sale of various sugar and sugar substitute products, salt and pepper products, dessert mixes, liquid portion products, ready-to-drink products, gelatin products, and private label canned meats to retail and foodservice customers. This segment also includes the processing, marketing, and sale of nutritional food products and supplements to hospitals, nursing homes, and other marketers of nutritional products.
Specialty Foods net sales increased 14.5 percent for the third quarter and 9.6 percent for the first nine months of fiscal 2008, compared to the same periods of fiscal 2007. Tonnage increased 10.0 percent and 3.4 percent for the quarter and nine months, respectively, compared to the prior year. Segment profit for Specialty Foods increased 20.0 percent in the third quarter and 4.8 percent for the nine months, compared to 2007 results.
All three operating segments within Specialty Foods contributed to both the net sales and profit increases in the third quarter. HSP experienced increased sales in contract manufacturing, private label desserts, and private label luncheon meat. CFI significantly expanded its sales of ready-to-drink products during the third quarter, and results also benefited from increased sales of ingredients and nutritional powders. Improved results at DCB reflect the impact of pricing advances taken earlier in the year in response to input cost increases. During the quarter, DCB also completed the acquisition of Boca Grande, a small liquid packet manufacturer in Georgia.
Increased input and freight costs have impacted results for Specialty Foods throughout fiscal 2008, and are expected to continue to remain above prior year levels during the fourth quarter. Additional pricing initiatives are being pursued, where possible, to offset a portion of that cost impact.
The All Other segment includes the Hormel Foods International (HFI) operating segment, which manufactures, markets, and sells Company products internationally. This segment also includes various miscellaneous corporate sales.
All Other net sales increased 33.3 percent for the third quarter and 24.7 percent for the first nine months of fiscal 2008, compared to fiscal 2007. Segment profit increased 19.2 and 27.5 percent for the quarter and nine months, respectively, compared to prior year results. Strong HFI export sales of the SPAM family of products and fresh pork were key drivers for the improved results. The export gains more than offset the impact of higher input costs, a decline in equity in earnings related to the weakening Philippine peso, and continued lower results for the Company‚Äôs China operations. As increased raw material and freight costs are expected to continue for the remainder of the fiscal year, pricing initiatives are in place for the fourth quarter to mitigate the impact of the higher costs.
Unallocated Income and Expenses
The Company does not allocate investment income, interest expense, and interest income to its segments when measuring performance. The Company also retains various other income and unallocated expenses at corporate. These items are included in the segment table for the purpose of reconciling segment results to earnings before income taxes.
Net interest and investment income for the third quarter and nine months of fiscal 2008 was a net expense of $13,904 and $28,738, respectively, compared to a net expense of $5,260 and $13,911 for the comparable quarter and nine months of fiscal 2007. The higher expense primarily reflects a decline in investment results, including lower returns on the Company‚Äôs rabbi trust for supplemental executive retirement plans and deferred income plans, which decreased $5,346 and $10,922 for the third quarter and nine months, respectively, compared to the prior year. Interest expense of $7,450 for the third quarter also exceeded the prior year due to borrowings against the Company‚Äôs short-term line of credit related to working capital needs. The Company anticipates that interest expense will approximate $27,000 for fiscal 2008.
General corporate expense for the third quarter and nine months was $2,907 and $18,982, respectively, compared to $7,862 and $23,051 for the comparable periods of fiscal 2007. The decrease for both the third quarter and nine months was primarily the result of lower expenses associated with the Company‚Äôs long-term compensation plans and other benefits.
Related Party Transactions
There has been no material change in the information regarding Related Party Transactions that was disclosed in the Company‚Äôs Annual Report on Form 10-K for the year ended October 28, 2007.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $109,987 at the end of the third quarter of fiscal year 2008 compared to $104,504 at the end of the comparable fiscal 2007 period.
Cash provided by operating activities was $183,431 in the first nine months of fiscal 2008 compared to $155,672 in the same period of fiscal 2007. The increase in cash reflects higher earnings for the first nine months of fiscal 2008 and favorable changes in working capital. Positive variances related to federal income taxes and cash on deposit related to the Company‚Äôs hedging programs more than offset the impact of higher accounts receivable and inventory balances maintained during fiscal 2008.
Cash flow from operating activities provides the Company with its principal source of liquidity. Based on current business conditions, the Company does not anticipate a significant risk to cash flow from this source in the foreseeable future.
Cash used in investing activities decreased to $124,229 for the first nine months of fiscal 2008 from $127,452 in the comparable period of fiscal 2007. In the first quarter of fiscal 2007, the Company invested $20,483 in a joint venture with San Miguel Corporation for the purchase of a hog processing business in Vietnam. In the first nine months of fiscal 2008, the Company spent $27,175 related to acquisition activity, compared to $13,620 in the first nine months of fiscal 2007. The cash used in 2008 includes the recent acquisition of Boca Grande in the third quarter for a preliminary purchase price of $23,255. Fixed asset expenditures of $96,293 for the first nine months of fiscal 2008 were comparable to $96,602 in fiscal 2007. The Company estimates its fiscal 2008 fixed asset expenditures to be approximately $130,000, as expansion projects will continue in the fourth quarter related to additional value-added production capacity.
As of July 27, 2008, the Company held $8,899 of available-for-sale investments in auction rate securities. These securities are classified as other non-current assets, as credit market conditions caused the auction events for these securities to fail during the second and third quarters. As the auction rate securities held represent student loan receivables that are guaranteed by the U.S. government, the Company considers any current decline in value to be temporary and will continue to monitor the status of these securities in upcoming quarters.
Cash used in financing activities was $98,964 in the first nine months of fiscal 2008 compared to $96,201 in the same period of fiscal 2007. The Company used $56,472 for common stock repurchases in the first nine months of fiscal 2008, compared to $47,982 in the prior year. For additional information pertaining to the Company‚Äôs share repurchase plans or programs, see Part II, Item 2 ‚ÄúUnregistered Sales of Equity Securities and Use of Proceeds.‚ÄĚ Increased cash flows generated from the exercise of stock options granted under the Company‚Äôs stock option plan offset a portion of the outflows related to this repurchase activity during fiscal 2008.
Cash dividends paid to the Company‚Äôs stockholders also continue to be a significant financing activity for the Company. Dividends paid in the first nine months of 2008 were $70,585 compared to $60,524 in the comparable period of fiscal 2007. For fiscal 2008, the annual dividend rate has been increased to $0.74 per share, reflecting a 23.3 percent increase over the 2007 rate. The Company has paid dividends for 320 consecutive quarters and expects to continue doing so.
The Company is required, by certain covenants in its debt agreements, to maintain specified levels of financial ratios and balance sheet position. At the end of the third quarter of fiscal 2008, the Company was in compliance with all of these debt covenants.
Contractual Obligations and Commercial Commitments
As discussed in Note K of the Notes to Consolidated Financial Statements, the Company adopted the provisions of FIN 48 at the beginning of fiscal 2008. The Company is unable to determine its contractual obligations by year related to this pronouncement, as the ultimate amount or timing of settlement of its reserves for income taxes cannot be reasonably estimated. The total liability for unrecognized tax benefits, including interest and penalties, at July 27, 2008, was $38,716.
There have been no other material changes to the information regarding the Company‚Äôs future contractual financial obligations that was disclosed in the Company‚Äôs Annual Report on Form 10-K for the year ended October 28, 2007.
Off-Balance Sheet Arrangements
The Company currently provides a revocable standby letter of credit for $1,940 to guarantee obligations that may arise under workers compensation claims of an affiliated party. The Company has also guaranteed a $9,000 loan of an independent farm operator, of which approximately $2,900 of the loan proceeds have been spent to date. As of July 27, 2008, these potential obligations were not reflected on the Company‚Äôs consolidated statements of financial position. See additional information regarding these off-balance sheet arrangements in Note A of the Notes to Consolidated Financial Statements in this Form 10-Q.
This report contains ‚Äúforward-looking‚ÄĚ information within the meaning of the federal securities laws. The ‚Äúforward-looking‚ÄĚ information may include statements concerning the Company‚Äôs outlook for the future as well as other statements of beliefs, future plans, strategies, or anticipated events and similar expressions concerning matters that are not historical facts.
The Private Securities Litigation Reform Act of 1995 (the Reform Act) provides a ‚Äúsafe harbor‚ÄĚ for forward-looking statements to encourage companies to provide prospective information. The Company is filing this cautionary statement in connection with the Reform Act. When used in the Company‚Äôs Annual Report to Stockholders, in filings by the Company with the Securities and Exchange Commission (the Commission), in the Company‚Äôs press releases and in oral statements made by the Company‚Äôs representatives, the words or phrases ‚Äúshould result,‚ÄĚ ‚Äúbelieve,‚ÄĚ ‚Äúintend,‚ÄĚ ‚Äúplan,‚ÄĚ ‚Äúare expected to,‚ÄĚ ‚Äútargeted,‚ÄĚ ‚Äúwill continue,‚ÄĚ ‚Äúwill approximate,‚ÄĚ ‚Äúis anticipated,‚ÄĚ ‚Äúestimate,‚ÄĚ ‚Äúproject,‚ÄĚ or similar expressions are intended to identify forward-looking statements within the meaning of the Reform Act. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those anticipated or projected.
In connection with the ‚Äúsafe harbor‚ÄĚ provisions of the Reform Act, the Company is identifying risk factors that could affect financial performance and cause the Company‚Äôs actual results to differ materially from opinions or statements expressed with respect to future periods. The discussion of risk factors in Part II, Item 1A of this report on Form 10-Q contains certain cautionary statements regarding the Company‚Äôs business, which should be considered by investors and others. Such risk factors should be considered in conjunction with any discussions of operations or results by the Company or its representatives, including any forward-looking discussion, as well as comments contained in press releases, presentations to securities analysts or investors, or other communications by the Company.
In making these statements, the Company is not undertaking, and specifically declines to undertake, any obligation to address or update each or any factor in future filings or communications regarding the Company‚Äôs business or results, and is not undertaking to address how any of these factors may have caused changes to discussions or information contained in previous filings or communications. Though the Company has attempted to list comprehensively these important cautionary risk factors, the Company wishes to caution investors and others that other factors may in the future prove to be important in affecting the Company‚Äôs business or results of operations.
The Company cautions readers not to place undue reliance on forward-looking statements, which represent current views as of the date made. Forward-looking statements are inherently at risk to any changes in the national and worldwide economic environment, which could include, among other things, economic conditions, political developments, currency exchange rates, interest and inflation rates, accounting standards, taxes, and laws and regulations affecting the Company and its markets.
Good morning. Welcome to the Hormel Foods conference call for the fourth quarter of fiscal 2008. We released our results this morning before the market opened around 6:30 AM Central Time. 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 Jeff Ettinger, Chairman of the Board, President and Chief Executive Officer; and Jody Feragen, Senior Vice President and Chief Financial Officer. Jeff will provide a review of the operating results for the quarter and the year. Then Jody will provide detailed financial results for the quarter and the year. Jeff will then provide an outlook for fiscal year 2009. The line will be open for questions following Jeff‚Äôs closing remarks.
An audio replay of this call will be available beginning at 11:00 AM Central Time today, November 25, 2008. The dial-in number is 800-405-2236 and the access code is 11118122. It will also be posted on 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 cost and availability of raw materials and market conditions for finished products.
Please refer to Pages 26 through 31 in the company‚Äôs 10-Q for the fiscal quarter ended July 27, 2008 for more details. It can be accessed on our website. Now I‚Äôll turn the call over to Jeff.
Jeffrey M. Ettinger
Good morning. Results for our fourth quarter were mixed. Top line growth was strong with sales for the quarter reaching $1.86 billion, up 12% from the prior year and up 10% excluding acquisitions. However, our bottom line results were clearly disappointing to us. Earnings per share for the quarter were $0.50 compared to $0.73 last year, a decrease of 32%. Included in these results was a $20 million investment loss in the company‚Äôs rabbi trust. For the full year, sales were $6.75 billion, up 9% from last year and up 7% excluding acquisitions.
Earnings per share for the full year were $2.08, down 4% from last year. Total segment operating profits were up 6% from a year ago. Without question, we are in a unique and challenging economic environment. Demand has been impacted by the trend to more at home dining and through changing consumer preferences at retail. These circumstances, coupled with spikes in certain raw material costs, took a toll on our earnings this quarter.
Nevertheless, we had some positive highlights during the quarter as well. I will now take you through each of the segments. For our grocery products segment, dollar sales were up 6% and segment profit was down 3%. For the year, sales were up 8% and segment profit was up 5%. As has been widely reported in the media, sales of the Spam family of products were up solidly during the quarter. I am also pleased to report that other core items such as Hormel Chili, Dinty Moore Stew and Mary Kitchen Hash also experienced strong dollar sales and volume growth.
For grocery products on the flip side, sales of Hormel Compleats and Microwave Meals slowed during the quarter, attributable to the combination of higher pricing and apparent changes in consumer buying preferences. In addition, margins for several grocery products items were pressured during the quarter, primarily due to higher beef and pork trim costs.
The refrigerated foods segment capped off a strong year with a solid fourth quarter, reporting 11% higher sales, up 9% excluding acquisitions and 12% higher segment profit. For the full year, sales increased 8%, 4% excluding acquisitions and segment profit increased 22%. Declining hog prices and favorable cut out values were the primary drivers of earnings growth for this segment during the fourth quarter.
In our meat products group, products experiencing strong growth during the quarter included Natural Choice Deli Meats, Hormel Refrigerated Entrees and Hormel Always Tender Flavored Pork Loins. However, margins on some meat product items were pressured by spiking input costs that we were not able to offset with pricing. Our food service division experienced flat sales, as they were affected by the industry wide declines in away from home dining. Our Farmer John group saw improved results during the quarter, primarily as a result of their fresh pork operations.
For Jennie-O Turkey Store, the 44% drop in Q4 operating profit was about what we expected but that did not make it any easier to absorb in terms of its affect on our company wide results. Sales dollars were up 11%, reflecting a combination of necessary price advances and some volume gains, and for the full year sales were up 9% while segment profit was down 27%. An industry wide excess supply of commodity turkey breast meat and lower demand has resulted in a stagnant market. Higher input costs for feed and fuel also contributed to the decline in operating profit during the quarter at Jennie-O Turkey Store.
The retail segment of Jennie-O Turkey Store continues to be a bright spot, with volumes in sales dollars increasing during the quarter. In particular, sales of Jennie-O Turkey Store trade pack products and turkey burgers continued to register impressive sales gains.
The specialty food segment had an excellent quarter, with sales, volume and segment operating profit all experiencing double-digit increases. Operating profit was up 49% and dollar sales were up 20%, up 16% excluding acquisitions, with all three sub-business units contributing to these gains. For the full year, operating profit for specialty food increased 14% and dollar sales were up 12%, up 11 excluding acquisitions.
Results in specialty products were driven by increased sales in contract manufacturing and savor ingredients. Diamond Crystal‚Äôs results were led by higher nutritional sales volume and the bulk of Grande Foods acquisition. Country Foods International finished off an excellent year, with significant gains in tonnage and sales and blended ingredients, nutritional powders and ready-to-drink products.
In the all other segment, our international business had a soft ending to an otherwise excellent year. In the fourth quarter, operating profit was down 8% while dollar sales were up 34%. For the full year, sales were up 27% and operating profit was up 17%. Results in the quarter were adversely impacted by higher raw material costs and the strengthening dollar against key currencies. Positives for international during the quarter were strong exports of fresh pork and strong sales of the Spam family of products.
At this time, I will turn the call over to Jody Feragen to discuss the financial information relating to the fourth quarter and fiscal 2008.
Jody H. Feragen
Thank you Jeff. Good morning. Earnings for the fiscal 2008 fourth quarter totaled $67.8 million or $0.50 per share compared to $101.2 million or $0.73 per share a year ago. Earnings for the 12 months of fiscal 2008 totaled $285.5 million or $2.08 per share compared to $301.9 million or $2.17 per share a year ago.
As Jeff alluded to at the outset, the rabbi trust losses were the primary driver of our earnings miss for the year. This trust was explained in your earnings release. Those investment losses do not affect the company‚Äôs cash flow nor is the company under any obligation to recapitalize the trust fund.
Dollar sales for the fourth quarter totaled $1.9 billion compared to $1.7 billion last year, a 12% increase. Acquisitions added about $23 million to the top line in the fourth quarter. For the full year, dollar sales increased 9% to $6.8 billion. Acquisitions added $130 million to the top line for the full year.
Volume for the fourth quarter was 1.2 billion pounds, up 3% from fiscal 2007. Acquisitions added about 15 million pounds to the quarter. Volume for the full fiscal year was 4.7 billion pounds, up 5% from fiscal 2007. Acquisitions added about 88 million pounds to the full year.
Our selling and delivery expenses in the fourth quarter were 11.4% of sales this year compared with 11.6% last year. Year-to-date, selling and delivery expenses were 12.4% of sales compared to 12.5% last year. We expect selling and delivery expenses to be about 12.2% of sales for fiscal 2009, as lower fuel costs are offset by higher marketing expenses.
Advertising expenses were 1% of sales for the quarter compared to 0.8% last year. While year-to-date advertising expenditures increased in absolute dollars, the expenses were 1.5% of sales, even with fiscal 2007. Advertising expenditures for fiscal 2009 are expected to exceed those of fiscal 2008 as we continue media campaigns to support our brands.
Our general and administrative expense was 2.3% of sales for the quarter, the same as last year‚Äôs fourth quarter. For the full fiscal 2008, general and administrative was 2.6%, even with last year. We expect general and administrative expenses to be about 2.8% of sales in fiscal 2009.
The dramatic decline in investment income was attributable primarily to the performance of our rabbi trust assets. The decline reflects the overall challenging investment environment. We experienced a $20 million investment loss, most of which occurred in the last month of the quarter, compared with the $5 million gain for the same quarter a year ago. For the full year, investment losses were about $29 million.
Interest expense for the quarter was $7.4 million compared to $7.7 million last year. Year-to-date interest expense was $28 million compared to $27.7 million last year. We expect interest expense to be approximately $29 million for fiscal 2009. Total long term debt at the end of the quarter was $350 million and we ended the quarter with $100 million outstanding on our short term line of credit, related mostly to working capital.
Depreciation and amortization for the quarter was $31 million compared to $33 million last year. For the full year, depreciation and amortization was $126 million compared to $127 million last year. We expect in 2009 that depreciation and amortization will approximate $130 to
$135 million. Our effective tax rate in the fourth quarter was 41.9% versus 34.9% in fiscal 2007. This higher rate is attributed to the mark to market losses in the rabbi trust, which are not tax deductible. The year-to-date effective tax rate is 37.6% compared to 35.7% last year. For fiscal 2009, we expect the effective tax rate to be between 36 and 37%.
Capital expenditures for the quarter totaled $30 million compared to $29 million last year. For the full year, capital expenditures totaled $126 million, even with last year. For fiscal 2009 we expect capital expenditures to approximate $140 to $150 million, mainly related to completion of our new production plant in Dubuque, Iowa. Given changes in consumer preferences, we intend to use this plant for both microwave and canned products manufacturing.
As we stated in our earnings release, we will continue to be conservative in managing our capital. That said, our priorities continue to be using our cash flow to grow our business and return cash to our shareholders. We are more cautious today given the uncertainty in the credit markets but we do remain confident that adequate capital will be available to meet our strategic growth needs.
The basic weighted average number of shares outstanding for the fourth quarter and full year was 135 million. The diluted weighted average number of shares outstanding for the fourth quarter was 136 million versus 137 million for the full year. We repurchased 367,000 shares of common stock during the fourth quarter at an average price of $35.62. We have 2.3 million shares remaining to be purchased from the 10 million share authorization in place. As I stated before, we will continue to be strategic in repurchasing shares of our stock as a use of our free cash flow.
We processed 2.4 million hogs in the quarter, even with last year. For the full year, we processed 9.5 million hogs compared to 9.4 million last year. The average live hog cost in the fourth quarter was $57 per live hundredweight, just below our forecasted range of $58 to $62 that we called out during our third quarter conference call. This compared with an average live base of $49 in the same quarter last year.
At this time, I will turn the call back over to Jeff to discuss the outlook for fiscal 2009.
Jeffrey M. Ettinger
Thanks Jody. As set forth in our release, we anticipate a combination of external factors to impact our business in fiscal 2009. The challenges we face include an over supply of turkey breast meat and higher commodity costs during the early part of the year at Jennie-O Turkey Store; the prospect of increasing hog prices as supplies gradually decline; and the uncertain economic environment affecting consumer demand.
Opportunities include the flexibility that our strong balance sheet provides; the stability of our balanced model; and the continued momentum and success of our value added products. On this latter point, we remain on track to achieve our $2 billion of new product sales by 2012 from sales of products introduced since the year 2000. After assessing these factors in our business plans for the upcoming year, we have established our fiscal 2009 guidance range at $2.15 to $2.25 per share versus the $2.08 per share results we announced today for 2008.
Consistent with my comments in our August conference call, our first half earnings will likely be down in comparison to our strong start in fiscal year 2008. We do expect to rebound sharply in the second half, allowing us to achieve higher earnings for the full year in 2009. I remain confident about our future, notwithstanding the difficulties posed by various macro factors. We have a great team of experienced, dedicated employees. We have a strong portfolio of leading brands within their categories. We are still the leader of value added meals that feature protein.
Our products have proven to be highly relevant to consumers during hard times, as evidenced by our continued sales growth. We operate from a solid financial position, which not only gives us the flexibility to weather hard times but also positions us to make strategic investments in areas that can generate additional profitable growth for our company.
Finally, we believe our stock is undervalued and that investors with a long term outlook, seeking a quality investment, would be well served to give serious consideration to an investment in our company. At this point, I would like to turn the call over to the Operator for questions and answers from our participants.