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Hormel Foods Corporation (NYSE:HRL)
Q3 2018 Earnings Conference Call
Aug. 23, 2018, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Hormel Foods Third Quarter 2018 Earnings Release Conference Call. At this time, all participants are in a listen-only mode. As a reminder, this conference is being recorded Thursday, August 23, 2018. I would like to turn the conference over to Nathan Annis, Director of Investor Relations. Please go ahead.

Nathan P. Annis -- Director of Investor Relations

Good morning. Welcome to the Hormel Foods conference call for the third quarter of fiscal 2018. We released our results this morning before the market opened around 6:30 a.m. Eastern. If you did not receive a copy of the release, you can find it on our website at hormelfoods.com under the Investor 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 the remainder of 2018. Jim Sheehan will provide detailed financial results for the quarter and further assumptions relating to our 2018 outlook.

The line will be open 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 into the queue.

An audio replay of this call will be available beginning at 11:00 a.m. today Central Standard Time. The dial-in number is 888-220-8451 and the access code is 8905023. 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 34-40 in the company's Form 10-Q for the quarter ended April 29, 2018 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 third quarter operating performance by excluding sales and volume impact of the acquisitions of Ceratti, Columbus Craft Meats, and Fontanini. Discussion on non-GAAP information is detailed in our press release located on our corporate website. Please note, 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.

James P. Snee -- Chairman, President, and Chief Executive Officer

Thank you, Nathan. Good morning, everyone. We are pleased to report our team delivered record sales and earnings in the third quarter. Our company's long-term growth formula is anchored in building brands, innovation, strategic acquisitions, and achieving balance across our portfolio. We take a consistent, long-term approach to our business decisions and strategy.

Over the years, we have increased marketing investments in support of our brands. I am pleased to report those investments are paying off, with growth from both established brands, such as SPAM and Skippy, and with emerging brands, such as Natural Choice, Applegate, Jennie-O, Wholly Guacamole, and Herdez.

We are also delivering innovation to the marketplace at a faster cadence than ever before. Food service innovations, such as Bacon 1, Fire-Braised meats, and Austin Blues, continue to generate growth. Retail innovations, like Skippy PB bites, Herdez guacamole salsa, and Natural Choice snacks, are also making meaningful contributions to our results.

Our recent disciplined and strategic acquisitions expand our presence in areas where we are a market leader, such as deli and food service. While it is early, I am happy to report the Fontanini, Columbus, and Ceratti acquisitions are meeting our expectations.

The final component of our long-term formula is balance. This is why we made the decision last week to divest the Fremont harvest facility, which when complete, will decrease our earnings volatility.

Our long-term strategy is sound and our experienced leadership team is executing this strategy. We achieved record sales and earnings in the third quarter as we managed through foreign trade uncertainty, increased freight costs, and commodity market volatility. We generated record earnings per share of $0.39, up 15% from last year. The benefit from tax reform also contributed to our record results. Record third quarter sales were up 7% on a 5% volume increase. The increases were driven by the recent strategic additions of Ceratti, Columbus Craft Meats, and Fontanini, as well as growth from many of our brands across our entire organization.

On an organic basis, volume was up 1% while sales were flat. Strength in key brands across our portfolio were offset by lower pork and turkey markets, which drove decreased pricing for the quarter. Third-party consumption data continues to show growth across our portfolio in both center-store and the parameter of the store. We are pleased to see growth in household penetration this quarter from emerging brands, such as Herdez, Natural Choice, and Jennie-O, and also from established brands, such as SPAM, Skippy, and Dinty Moore.

Grocery Products had a solid quarter. We are pleased with the continued growth from our core Grocery Products portfolio, as that team grew sales mid-single digits. Brands such as Skippy, Hormel chili, Wholly Guacamole, and Herdez all delivered excellent sales growth this quarter. Total Grocery Products sales were flat due to declines in CytoSport and our contract manufacturing business.

Earnings grew 4%, as our core Grocery Products portfolio continued to deliver excellent results and were able to offset declines in contract manufacturing, increased advertising investments, and increased freight costs. The team at CytoSport continues to work on improving their business results. While volume and sales declined, earnings grew for the quarter due to lower selling, general, and administrative expenses.

Our International segment delivered sales growth of 11% on a volume increase of 9%. Sales increased on stronger exports of SPAM luncheon meat and Skippy peanut butter, favorable results in China, and the addition of the Ceratti business in Brazil. We continue to gain momentum in China as we grow distribution for our SPAM family of products. International segment profit increased 9% despite lower fresh pork export earnings, higher advertising investments, and increased freight costs.

Refrigerated Foods grew volume 5% and sales 10%. In addition to strong value-added sales growth, the inclusion of the Fontanini and Columbus acquisitions also contributed to improved sales. A reduction in hog harvest volume of 4% drove an organic volume decline of 2% and an organic sales decline of 3%. Pricing declined due to lower pork markets year-over-year.

We continue to grow our branded, value-added volume and sales in the retail, food service, and deli channels. Brands such as Austin Blues, Fire-Braised meats, Cafe H, and Natural Choice all showed strong sales growth in the food service channel. We have also successfully launched the Applegate brand into the food service channel as we work to introduce this leading brand to operators around the country. The Natural Choice and Applegate brands also generated excellent sales growth in the retail channel, as consumers continue to search for brands that align with their lifestyles.

On a segment profit basis, Refrigerated Foods value-added increases were able to offset a dramatic decline in commodity pork profits, higher freight costs, and higher advertising investments. Commodity profits were down 88% to near breakeven levels. This accomplishment speaks to the team's ability to deliver results and to the long-term strategy of moving the portfolio away from commodity business toward branded, value-added products. Jennie-O Turkey Store delivered strong volume growth of 14% and sales growth of 8%. Our three value-added businesses all grew volume and sales this quarter. Value-added sales growth was led by Jennie-O lean ground turkey, Jennie-O premium deli items, and the Jennie-O oven ready products. Sales also increased due to earlier shipments of whole birds to minimize cold storage expenses. Segment profit declined 23% due to lower whole bird and commodity prices.

As we look to our fourth quarter, we expect to remain on track with our previous earnings guidance. We expect a strong finish to the year from Refrigerated Foods, as they continue to grow value-added sales and profits while managing through commodity volatility. We anticipate the International segment to generate earnings growth in the fourth quarter, given the positive momentum that team has with branded exports and improving business results in China. We do see risk from tariffs, which could negatively impact fresh pork exports and the segment's results. We anticipate a slight decline in earnings for Grocery Products. We expect to generate ongoing growth in the core center-store portfolio while managing through continued declines in contract manufacturing.

For Jennie-O Turkey Store, we still expect earnings to decline in the fourth quarter compared to last year. We see fundamentals slowly improving and are encouraged by trends in the turkey breast meat market. We will not lap the declines in the whole bird business until calendar 2019, but expect our successful Make the Switch campaign to drive branded sales growth, including our lean ground turkey product line.

We continue to see double digit increases in per unit freight costs. Our efforts to find mutually agreeable solutions with our customers are helping to offset a portion of this increase.

Taking all these factors into account, we are reaffirming our earnings guidance of $1.81 to $1.95 per share. We have lowered our sales guidance to $9.4 billion to $9.6 billion from $9.7 billion to $10.1 billion, due to lower pork commodity markets.

Last week we announced an agreement to sell the Fremont processing facility to WholeStone Farms. This was not an easy decision. The Fremont facility has been an important part of our company for decades and we are pleased to have found a home for this team and facility with WholeStone Farms. Fremont is a single shift operation. Given the changes in the pork industry, the facility will need additional investments to keep it competitive. I'm pleased to see that WholeStone Farms has committed to modernize the facility. This strategic decision right-sizes our pork supply chain, reduces our earnings volatility, and is aligned with our vision as a global branded food company.

At this time, I will turn the call over to Jim Sheehan to discuss our financial information relating to the quarter, key assumptions for the remainder of fiscal 2018, and financial and operational details of the Fremont transaction.

James N. Sheehan -- Senior Vice President and Chief Financial Officer

Thank you, Jim. Good morning to everyone. In the third quarter, we increased our investment into our business in the form of advertising, capital expenditures for our value-added products, and a universal stock option grant for 20,000 employees. The third quarter marked the completion of 90 consecutive years of quarterly dividends. Our financial strategy and capital allocation decisions support the long-term growth strategy that Jim discussed.

Volume for the third quarter was 1.2 billion pounds, a 5% increase compared to last year. We generated record sales for the third quarter of $2.4 billion, a 7% increase. Net earnings were $210 million, up 15% compared to last year.

For the quarter, SG&A expenses, excluding advertising, were 7.2% of sales compared to 6.9% last year. The impact of acquisitions drove the increase. Advertising investment was $40 million compared to $24 million last year. We are currently advertising key growth brands, including Skippy, SPAM, Jennie-O, and Natural Choice.

General corporate expenses increased primarily due to employee-related expenses, including the $4 million expense related to universal stock options. Expenses also increased $2 million due to tax-related services. Operating margins were 11.1%, a 160 basis point decrease compared to last year. The decline is primarily a result of lower margins at Jennie-O and higher freight across the entire business.

Our effective tax rate was 18.4% compared to 34.3% last year. We engaged a third party to review our deferred tax liabilities in light of changes from tax reform. As a result of this study, the quarter reflects reduced taxes of $8 million. A $2 million expense was recorded in general corporate to complete this study. Considering this event, we now estimate our full-year effective tax rate will be between 15% and 16%. This implies a fourth quarter tax rate between 21% and 24%.

Year-to-date, we have generated operating cash flows of $743 million, up 40%. The increase was related to higher earnings and improved working capital. Capital expenditures for the quarter totaled $103 million compared to $42 million last year, as we continued to invest in new production facilities and manufacturing capacity for our value-added businesses. We expect capital expenditures to be approximately $400 million in 2018.

In the quarter, we paid $99 million of dividends at the annual rate of $0.75 per share. This marked our 360th consecutive quarterly dividend. Total debt is $720 million. This is split between long-term and short-term debt. We remain in a strong financial position to fund other investments. We did not repurchase any stock this quarter.

We continued to focus on three factors in the hog industry: export demand, domestic demand, and industry capacity utilization. Exports remain uncertain, impacted by multiple rounds of tariffs and recent animal health issues in China. The USDA forecasts export volume to be up 6% in 2018. Domestic consumption remains very high. However, pork pricing has come down since last year, as the USDA composite value was 16% below year-ago levels in the third quarter. We expect hog supplies to increase 3% to 4% and expect continued hog supply growth into 2019.

The sale of the Fremont facility is the culmination of a multiyear assessment of the pork industry, as well as a detailed review of the capital required to modernize the Fremont facility. We concluded that running Fremont as a single-shift operation was not a viable option and we would have to either spend the capital to modernize the facility, find a long-term supply partner, or close the facility over time.

We began discussions with WholeStone Farms after learning of their interest to enter the hog processing business. Our discussions resulted in the sale of the facility at terms that provide benefits to both parties. The purchase price of the transaction is $30 million and includes the Fremont processing facility and a multiyear agreement to provide pork and raw materials from the first shift of production at market-based prices.

The sale of the Fremont facility allows us to do a number of things. First, this transaction allows us to contractually secure a source of raw material for our value-added business at competitive market prices. Second, this deal reduces the number of hogs we purchase and related exposure to volatility to the hog markets. Finally, the sale of the plant allows us to avoid significant capital to modernize the facility. For example, we recently invested $80 million to modernize the Austin facility. A similar investment would be required for Fremont, in addition to investments to double shift the facility.

We expect approximately $15 million to $20 million of expenses associated with this sale in fiscal 2019. These expenses include the cost to move value-added equipment out of the facility and various pension-related expenses.

Fremont harvests 10,500 hogs per day and currently represents one-third of our harvest volume and less than one-third of Refrigerated Foods commodity pork earnings. We will provide further guidance on the impact to fiscal 2019 on our fourth quarter earnings call.

Input costs for the third quarter were generally lower. Hog prices were 10% lower than last year. We expect hog prices to be lower than last year in the fourth quarter. Belly prices were 20% lower than last year. We expect belly prices to remain volatile and below year-ago levels. 72% pork trim prices were 22% below last year. We expect trim markets to be modestly lower than 2017 levels. As we look into the first half of fiscal 2019, we see flat to lower hog, belly, and trim prices. We do expect volatility as new harvest plants and hog supplies come online.

50% beef trim was 43% lower compared to last year. We expect beef trim prices to be similar to 2017 levels. Market costs for feed were higher compared to last year. We expect feed costs to be higher year-over-year in the fourth quarter.

We continue to see signs of a slow recovery in the turkey industry. All placements have shown low single digit declines in recent months, which indicates lower harvest levels in the coming quarters. Turkey breast meat and whole birds in cold storage are still well above long-term average levels. Breast meat prices increased during the quarter. Breast meat averaged $1.88 per pound compared to $1.53 last year. We expect moderate increases in the coming quarters. Whole bird prices are 17% lower than 2017 levels and we do not expect a material change in pricing until the first quarter of fiscal 2019.

Various market factors, including tariffs, freight, supply levels, and demand have all created market volatility, yet we have demonstrated an ability to manage through this volatility and deliver long-term value for our shareholders.

At this time, I will turn the call over to the operator for the question-and-answer portion of the call.

Questions and Answers:

Operator

Thank you, sir. Our first question is coming from Akshay Jagdale from Jefferies. Please go ahead. Your line is open.

Akshay Jagdale -- Jefferies -- Analyst

Hi. Good morning. I wanted to get a sense on Jennie-O turkey profitability and how you see it. What's the long-term bridge to a more sustainable and higher level? Right? So we have low breast meat prices, which seem to be moving off of a bottom, and then you've got a bunch of higher costs. So maybe you can help us just think through, high-level, long-term, how we're going to regain the profitability levels that we've seen in this business historically? Thank you.

James P. Snee -- Chairman, President, and Chief Executive Officer

The JOTS business, we still remain very pleased with that business, very pleased with the value-added growth that we're seeing, just like we did this most recent quarter. Over time, certainly we need to make sure that the supply comes in balance in the marketplace. We've talked a lot about lower pulp placements. We've talked a lot about the need for reduced inventory in cold storage. And although we're seeing those trends, they're happening slower than we've expected. And you're correct, we are seeing higher breast meat pricing. We're seeing a stabilized whole bird market, which are very positive for the fundamentals of the business. But over the long-term for us, it's really about our ability to continue to grow the value-added business and we believe the results that we've delivered in the third quarter are a very good indication that the business is healthy and will return to growth in 2019.

Akshay Jagdale -- Jefferies -- Analyst

That's helpful. And one follow-up, I guess, would be on the Refrigerated Foods business. So obviously the value-added business is doing exceptionally well and offsetting some of the weakness in the commodity markets. I know you gave a lot of estimations so we'll have some time to digest it afterwards, but can you help us understand sort of where you think the commodity margins are? I mean, have they bottomed out or do you think things might get a little bit worse before they get better as it relates to industry capacity utilization rates? Thank you.

James P. Snee -- Chairman, President, and Chief Executive Officer

That's a number that's very, very hard to predict. I mean, clearly we're dealing with a lot of projections that remain uncertain and volatile. There have been a number of announcements in terms of increased hog processing capacity. But in terms of what happens with the timing of that, that'll feed into projections and into that volatility. So, at this point, it's really, really hard to say.

Akshay Jagdale -- Jefferies -- Analyst

Okay. I'll pass that on. Thank you.

Operator

Your next question is coming from Ken Zaslow from BMO. Please go ahead. Your line is open.

Ken Zaslow -- BMO Capital Markets -- Analyst

Good morning, everyone.

James P. Snee -- Chairman, President, and Chief Executive Officer

Good morning, Ken.

Ken Zaslow -- BMO Capital Markets -- Analyst

Two questions. Will you be able to grow EBITDA in 2019?

James P. Snee -- Chairman, President, and Chief Executive Officer

We're in the midst of the planning process for '19 and our early look into fiscal '19 shows pre-tax growth. Obviously we'll have more precise guidance for everyone on our November call.

But as we think about all the different businesses, with Refrigerated Foods, we expect to see continued value-added growth. We'll have our deli division fully up and running. The impact of the recent acquisitions. And clearly we'll have impact of the Fremont sale that we'll talk to you more about on the fourth quarter call as well.

Our GP business, the core business, remains very, very strong. We're seeing growth from MegaMex, steady growth from nut butters on the core business, but also on the innovation front. The pipeline is very robust. We have work to do to continue to stabilize CytoSport and contract manufacturing in that portfolio but we think the outlook is very positive. We've talked a lot about the JOTS business, the slowly improving fundamentals, the growth in value-added, especially lean ground.

And then our International business, we're pleased with what we're seeing in China. We know that we have some volatility in the fresh pork exports due to tariffs. So, I mean, our early look into '19, Ken, shows pre-tax growth and we know that there's certainly some headwinds out there and unknowns in terms of the tariffs and we're going to battle through that. But, yeah, we do think we can grow pre-tax earnings in 2019.

Ken Zaslow -- BMO Capital Markets -- Analyst

Great. And my follow-up question, just a point of nuance, is, in the quarter, how much was freight and higher hog, higher belly prices relative to lower margins? Can you give some sort of relative so we can kind of understand the importance of different factors in the quarter? I'm gonna leave it there.

James P. Snee -- Chairman, President, and Chief Executive Officer

Sure. From a freight basis, it's still been a headwind in the quarter and we expect it to be a headwind into 2019. We've said, again, we're focused on finding those mutually agreeable solutions, in terms of minimizing miles, maximizing weight, less internal freight. And we've seen that we've offset a majority of the cost increase on a go-forward basis. And, Nathan, you can have a follow-up conversation perhaps on the quarter. But, really, for the full year, our freight costs are expected to be up $0.06 to $0.08 on an EPS basis for the full year.

Ken Zaslow -- BMO Capital Markets -- Analyst

Great. Thank you very much.

James P. Snee -- Chairman, President, and Chief Executive Officer

Yep. Thanks, Ken.

Operator

Your next question is coming from Eric Larson from Buckingham Research Group. Please go ahead.

Eric Larson -- The Buckingham Research Group -- Analyst

Yeah. Good morning, everyone. Thanks for taking my question.

James P. Snee -- Chairman, President, and Chief Executive Officer

Good morning, Eric.

Eric Larson -- The Buckingham Research Group -- Analyst

My question is on Fremont. And I'm kind of inferring that this is what your contractual obligations are going -- what your supply contract is going forward. But are you obligated -- are you contracting to take all of the output from Fremont going forward or just the needs that you have? In other words, are you moving away from some of the commodity-oriented products that would normally be produced and you will not have an obligation to sell that?

James P. Snee -- Chairman, President, and Chief Executive Officer

Yeah, Eric. So, in the short-term, it's going to be essentially business as usual. So we're contracted to take all of the meat, just like we do today, for the first three years. And then, over time, we'll have the opportunity to evaluate the business and make those decisions. But in the first three years, we are taking all of the meat off of the first shift, just like we do today.

Eric Larson -- The Buckingham Research Group -- Analyst

Yeah, OK. And that makes sense and I had assumed that that probably was the case. And then maybe this is for Jim Sheehan. And, Jim, I probably should know the answer to this because it's been a big delta for the whole year, but your general corporate expenses were up. It was a big delta in the quarter year-over-year. Can you explain what that is? You didn't highlight any one-time items that were in there. Can you just refresh us why your corporate expense is up so much in the quarter and for the full year?

James N. Sheehan -- Senior Vice President and Chief Financial Officer

Certainly. First of all, we talked about the universal stock options. The universal stock options were issued in the third quarter and that created a $4 million corporate expense. The other issue that we referenced was the tax study that we did. The tax study reduced our taxes in the third quarter by $8 million. There was a $2 million fee that exists within the corporate expense for that. And then we had generally higher employee expenses in the quarter.

Eric Larson -- The Buckingham Research Group -- Analyst

Okay. Thank you. I appreciate it. I'll pass it on.

Operator

Your next question is coming from Rupesh Parikh from Oppenheimer. Please go ahead.

Rupesh Parikh -- Oppenheimer & Co. -- Analyst

Good morning. Thanks for taking my questions. So on your EPS guidance for the full year, so it's still a pretty big range, so I was curious what are the key factors driving that larger range. And any sense at this point whether you're trending toward the bottom or higher end of that range?

James P. Snee -- Chairman, President, and Chief Executive Officer

Hey, good morning, Rupesh. Given what's happening in the marketplace -- we're talking a lot, obviously, about the volatility, whether it's tariffs, market conditions -- we felt it was appropriate to keep the range intact for the full year, obviously reaffirming that guidance. And then as we think about some of the things that could take you either way. On the high end, if we see continued declines in input costs, if there's a sudden end to tariffs, if there's a rapid recovery in turkey. On the lower end, the flip side or the inverse would be true if we see a spike in input costs, when you think about hogs, bellies, trim, grain, or if the tariff situation worsens. But we believe that the midpoint is still very reasonable and we thought it was very appropriate to keep the range where it is.

Rupesh Parikh -- Oppenheimer & Co. -- Analyst

Okay, great. And then my follow-up question on tariffs. I know there's a lot of different tariffs out there, and I think some proposals out there, so I was curious if you can just help us understand the dynamics currently. And then what is assumed in your current guidance?

James P. Snee -- Chairman, President, and Chief Executive Officer

Sure. So, I mean, obviously it's difficult since we're dealing with markets. For the back half of the year, it's about $0.01 to $0.02, primarily coming from our export business, our fresh pork exports. As we think about it on an annual basis, probably about $0.04 to $0.06, but clearly there's a lot of uncertainty. And as you think across our business, the impact would be pork, steel, aluminum, but the majority of that really is being export-related.

Rupesh Parikh -- Oppenheimer & Co. -- Analyst

Okay, great. Thank you.

Operator

Our next question is coming from Michael __ from Piper Jaffray. Please go ahead.

Michael Lavery -- Piper Jaffray -- Analyst

Thanks. Good morning. Could you just give an update on some of your supply chain reconfiguration? I don't remember you mentioning that as a driver of '19 earnings growth. What do you expect for some of the savings opportunity? What's some of the timing? Can you just help give us some more color on where that all stands?

James P. Snee -- Chairman, President, and Chief Executive Officer

Sure. Good morning. We put our supply chain in place earlier this year, led by Glenn Leitch. And we have kept Glenn and his team incredibly busy since that time, obviously dealing with all of the freight issues in the industry, evaluating our total supply chain. He was really the point person for the Fremont transaction. And we have got a lot accomplished in 2018. Doing a lot of work around insourcing production, asset utilization, some automation, efficiency projects, and then we can't forget the fact that we're in the midst of building a new facility in Melrose for our Jennie-O Turkey Store business and then a significant expansion for our value-added capacity down in Dold. So we've kept that team busy. We are working for a perspective on 2019 and we'll be able to provide you more detail on that in our fourth quarter call.

Michael Lavery -- Piper Jaffray -- Analyst

And then is it right to assume some of the freight efficiencies you're looking for are all integral to that work? And just related to freight, when you talk about some of that headwind continuing into next year, is that all on rates? Are you still seeing those going higher?

James P. Snee -- Chairman, President, and Chief Executive Officer

I mean, I think it's a combination of things. So, I mean, you're going to have -- who knows what's going to happen with fuel prices. Certainly the shortage of drivers can impact rates. What we're really focused on are the things that we can control and I mentioned it. It's the minimizing miles, maximizing freight, and really making sure that we're doing the right things on an internal basis so that we can offset as much of that as possible. But we feel really good about the work that's been done.

Michael Lavery -- Piper Jaffray -- Analyst

Okay. Thank you very much.

Operator

Your next question is coming from Jeremy Scott from Mizuho. Please go ahead.

Jeremy Scott -- Mizuho Americas -- Analyst

Hey. Good morning. I just want to talk a little bit about the Fremont sale. I guess it's one-third of processing, less than one-third of commodity sales, so that would imply that the value-added mix is somewhat higher than Austin. Maybe you can elaborate on what you meant by that. And then on the multi-purchase agreement, just the answer to the prior question on taking all of the meat. So it sounds like your overall volume is not going to be impacted because you said, "business as usual." However, I guess I'm a little bit confused as to what the margin structure on that looks like. I mean, presumably there's commodity product that you're going to be buying and then reselling without a value-added component. Is that right?

James P. Snee -- Chairman, President, and Chief Executive Officer

That is correct about the transaction. What we are losing is the spread between the hog costs and the USDA composite value. That's how I would look at it.

Jeremy Scott -- Mizuho Americas -- Analyst

Okay. So that's a pretty good margin today. But if you were to buy ham and then resell ham, that margin would effectively go to zero. Is that correct?

James P. Snee -- Chairman, President, and Chief Executive Officer

Well, you're correct that the margin is pretty good today. And what we've talked about is that historically it's less than 5% of Refrigerated Foods' earnings. In the current year, far less than that. We talked about a significant drop last quarter, about 25%. A significant drop this quarter of 88%. And then really what the future holds in terms of how much comes online, what the timing is, it's all projections and that remains very uncertain and volatile.

James N. Sheehan -- Senior Vice President and Chief Financial Officer

Yeah. So, as we've talked, we're giving up that spread but the margins in retail, the margins in food service will still retain. We're taking out the volatility and we still believe that this creates the right mix of internally sourced primals and outside-purchased primals. And it also allows us to avoid a very significant capital allocation. If you think about the Austin plant, that was over $80 million and did not include the cost to double shift this plant. So the capital investment into Fremont would have been very extensive.

Jeremy Scott -- Mizuho Americas -- Analyst

Okay. And then just the $30 million sale price. That's a good amount lower than what you were able to gain for Farmer John. I know it's an older plant and it needed some capital work but would that imply a lower normalizing margin than Farmer John or is there something in the multiyear purchase agreement with WholeStone that we need to consider going forward? Or is it just as you said, you're going to take the market price plus? What do we need to consider going forward as we're mapping this out?

James P. Snee -- Chairman, President, and Chief Executive Officer

Yeah, I think the first thing is that you can't look at the purchase price in a vacuum. Right? So the first thing is Fremont was not a full business like Farmer John. And then the price does not include any of the value-added assets. So we've talked about some of the expenses that we'll have in 2019 as we relocate those assets. But the price does not include any of that because we will retain that. As Jim mentioned, the facility really is in need of significant investment to remain competitive. In fact, it couldn't support both a double shift and value-added capacity. And so it does have the supply agreement at market-based prices, which we believe is a mutually beneficial agreement and it's consistent with our long-term strategy. And we're excited. I mean, we really look forward to a long, successful partnership with WholeStone.

Jeremy Scott -- Mizuho Americas -- Analyst

Got it. I'll jump back in the queue. Thank you.

Operator

Your next question is coming from Adam Samuelson from Goldman Sachs. Please go ahead.

Adam Samuelson -- Goldman Sachs -- Analyst

Yes. Thanks. Good morning, everyone. Maybe first question on Refrigerated and the value-added side. So the organic volumes in the quarter were down 2%. You talked about harvest levels down 4%. Could you talk about what the Ceratti and Columbus and Fontanini organic volume growth were in the period? I know they're still in M&A. But I'm just trying to think about what that organic volume growth looks like prospectively as you get those lapped into the base and you start comping some of the declines in harvest values that you've seen in the last few quarters.

James P. Snee -- Chairman, President, and Chief Executive Officer

Adam, I think it's safe to say the value-added growth that we saw in the quarter was significant. I mean, to be able to offset that type of commodity profit decline of 88% tells a story of value-added growth. And when you think about what's happening with Columbus, I mean, we're putting that deli sales division together to really leverage the strengths of the organization. The Columbus business remains very healthy and is going to be integral to the foundation of the deli division.

The Fontanini business also very healthy and we're now able to really leverage what the acquisition thesis was, in terms of taking our food service portfolio into the Fontanini organization and taking that Fontanini portfolio into the food service organization, so that we really, over time, we know that we're going to see a sequential acceleration in that food service business. And so, I mean, we feel really good about what both of those businesses are bringing to the party. And they're going to play a key role as we continue to drive that value-added business over time.

James N. Sheehan -- Senior Vice President and Chief Financial Officer

Adam, I would add that we completed the integration of both Columbus and Fontanini. The other thing that we've talked about is the volatility of the market can create some noise between quarters. And if you take a look at the belly market, the belly market has increased all during the third quarter and our pricing trails that increase. You saw a steep decline at the end of the third quarter in belly pricing. So that's one of the reasons why we feel that there will be a strong finish to Refrigerated Foods in Q4.

Adam Samuelson -- Goldman Sachs -- Analyst

Okay. And then just going back on Fremont, I just want to be clear on thinking about the sale price. So $30 million for the asset. You guys internally would think that there's at least $80 million of capital needed to go in. So effectively it's $110 million of some capital foregone that you don't have to spend. And from an earnings contribution of the plant, I mean, in the past you've talked about commodity profits in Refrigerated averaging about 15% of the segment, probably under that this year. And Fremont you talked about being less than a third of that. So the EBIT contribution of the plant, I'd guess this year somewhere in the $10 million to $20 million range. Is that a fair assessment? And then thinking about the sale price effectively is $110 million because it's capital that you'd otherwise have to spend?

James N. Sheehan -- Senior Vice President and Chief Financial Officer

Right. The commodity profits were down 88% in the third quarter and we discussed that they were near breakeven levels. The fact that Fremont is a single shift plant, it's not as efficient as the Austin plant, which is a highly efficient double shift plant. That's why the profits are less than the volume at the plant. And I would say that it's closer to $10 million a year than the numbers that you're throwing out.

Adam Samuelson -- Goldman Sachs -- Analyst

Okay. That's very helpful. I'll pass it on.

James P. Snee -- Chairman, President, and Chief Executive Officer

Thank you.

Operator

Your next question is coming from Robert Moskow from Credit Suisse. Please go ahead.

Robert Moskow -- Credit Suisse -- Analyst

Thanks. I guess a couple questions. One is on bacon pricing versus bellies, the spreads in the quarter. Were they favorable versus last year? I noticed that Bacon 1 was not mentioned in the press release as being a growth driver and that's the first time I've ever seen that in years. Bacon 1 has been a big driver of growth for you. So I just want to know what the spread was, whether it was good or bad.

And then, second, maybe we just take a step back at the big drivers for fiscal '19, the puts and takes. I imagine there's going to be the headwind from the costs to transition Fremont. You mentioned it there. $20 million or so. Maybe you could also help us on the commodity bridge to fiscal '19. Are you close to zero this year in commodity profits in pork and therefore we don't have to think about another decline in fiscal '19? Because, if you're close to breakeven this year, we don't have to worry about a tough comp in fiscal '19 on the commodity side. Or maybe we do. Can you help me with that?

James P. Snee -- Chairman, President, and Chief Executive Officer

Yeah. Good morning, Adam. Sorry, Rob. Why don't I go ahead? I'll take the bacon part and then we'll let Jim take the commodity part. So the bacon dynamics, we had a solid quarter on retail bacon. It's obviously a very competitive category. I think the spreads have been positive. So really no issue there. In terms of the food service bacon dynamics, there was no fundamental reason why it was omitted. We've seen strong demand for all of our bacon items, especially Bacon 1. And so the bacon category is very healthy for us. We feel really good about where it's headed and are excited because we're in need of the capacity that's coming online at our Dold facilities. So very, very healthy bacon dynamics.

James N. Sheehan -- Senior Vice President and Chief Financial Officer

Yeah, I'll talk a little bit about the pork commodity. As we talked about last quarter, profits were down 25%. This quarter they're down 88%, almost to near breakeven. As additional capacity comes online, and we talked about the additional capacity for a number of months now, and knowing that WholeStone was also going to add additional capacity into this, it's likely that you will see lower pork margins going forward than what you've seen historically. Historically, those margins have run about 15% of Refrigerated Foods. And that was all of the analysis that we made, that lowering our harvest level and sourcing the meat externally would be a favorable outcome.

James P. Snee -- Chairman, President, and Chief Executive Officer

And, Rob, I would add that we're still in Q4 and so it's hard to get a full-year projection. We obviously saw a significant decline in Q2 and Q3 and the market is a little different in Q4. So, again, we'll be able to give you some better visibility as we wrap up the year. But I think it just speaks volumes to the volatility that we've been talking about over the last couple of years.

Robert Moskow -- Credit Suisse -- Analyst

Can I ask a follow-up? I think, Jim, you talked about the outlook for '19, saying that you think you'll be driving some profitable growth in '19. And I guess I can see the logics, but the people I talk to are very worried about a protein glut overall in the market. The chicken companies are talking about it. There's too much beef on the market. Is it possible for your value-added business to benefit, I guess, from these lower input costs in this market? Is that what has to happen in order for profitable growth to occur in fiscal '19? Or are you worried, with all of this protein coming on, that even the value-added items might see some price pressure as well?

James P. Snee -- Chairman, President, and Chief Executive Officer

I mean, we think, Rob, that we would benefit obviously from lower input prices on our business. And I think the other issue is really what happens on the tariff front. And so there's rumblings out there about some progress that is being made. And, if that comes to resolution, that could change the dynamics. But, for us, we do certainly benefit from lower input costs across the portfolio.

Robert Moskow -- Credit Suisse -- Analyst

Okay. Thank you.

James P. Snee -- Chairman, President, and Chief Executive Officer

Thank you.

Operator

Your next question is coming from Heather Jones from Vertical Group. Please go ahead.

Heather Jones -- Vertical Group -- Analyst

Good morning. Thanks for taking my question.

James P. Snee -- Chairman, President, and Chief Executive Officer

Good morning, Heather.

Heather Jones -- Vertical Group -- Analyst

Good morning. Thinking about your tax guidance, so the review you did in the quarter, have you made any changes to where you think the '19 tax rate should shake out? Or should we still be thinking somewhere in the low 20s?

James N. Sheehan -- Senior Vice President and Chief Financial Officer

Heather, I'd think about 21.5% to 24.5%.

Heather Jones -- Vertical Group -- Analyst

Okay. I'm sorry. Go ahead.

James N. Sheehan -- Senior Vice President and Chief Financial Officer

So that's what we think Q4 will be and we still think that we'll be in the low 20s in 2019. Probably that same range in 2019.

Heather Jones -- Vertical Group -- Analyst

Okay. And then I just wanted to go back to the Fremont. And just -- I'm sort of curious. You said $10 million for that plant. So if I take how many hogs it was killing a day, it comes to about 2.5 million to 3 million hogs a year, assuming no Saturday kills. And so I was hoping you could give us a better understanding on what you all are defining as commodity because that would equate to only about $3.00 a hog, or $3.00 to $4.00 a hog. Which I know you guys said it's not the most competitive plant, but that is well below, on a LTM basis, well below what we've seen from others in the industry and well below industry margins. And I just wonder if you could give us a sense of how you're defining commodity when you say that it's closer to the $10 million number?

James N. Sheehan -- Senior Vice President and Chief Financial Officer

So we're defining the commodity as the spread -- the pork profitability margin -- along with some profitability that would include our commodity sales into the excess market, is what I would refer to.

Heather Jones -- Vertical Group -- Analyst

Commodity sales into the excess market is what you would call the commodity part?

James N. Sheehan -- Senior Vice President and Chief Financial Officer

Yeah. The provision sales.

Heather Jones -- Vertical Group -- Analyst

Okay.

James N. Sheehan -- Senior Vice President and Chief Financial Officer

And I think Nathan can probably drill down into it deeper offline.

Heather Jones -- Vertical Group -- Analyst

Okay. That's very helpful. Thank you.

Operator

Your next question is coming from Farha Aslam from Stephens. Please go ahead. Your line is open.

Farha Aslam -- Stephens, Inc. -- Analyst

Hi. Good morning.

James P. Snee -- Chairman, President, and Chief Executive Officer

Good morning, Farha.

Farha Aslam -- Stephens, Inc. -- Analyst

Just a quick follow-up on the tax question. What is the deferred taxes that you're including in your taxes for this year? Kind of the deferred tax revaluation benefit? Total overall?

James N. Sheehan -- Senior Vice President and Chief Financial Officer

Certainly. If you're talking about the change in the tax rate because of the study, what we did was to reassess our fixed assets to see if we could accelerate depreciation into the time period that had a higher statutory rate.

Farha Aslam -- Stephens, Inc. -- Analyst

Okay. But your revaluation of deferred assets, that was just completely in your first quarter and we didn't add to that this quarter?

James N. Sheehan -- Senior Vice President and Chief Financial Officer

Right. No, we reassessed that in the first quarter because, as the tax law took impact, had impact in the first quarter, you lower the amount that you can deduct in future years. So you reset that in the quarter. Your existing liability is reset at the time that the new tax rate is effective. Deferred tax is an ongoing change.

Farha Aslam -- Stephens, Inc. -- Analyst

Okay. And so sort of the tax benefit for this year, is that about $0.10?

James N. Sheehan -- Senior Vice President and Chief Financial Officer

About $65 million.

Farha Aslam -- Stephens, Inc. -- Analyst

About $65 million. Okay. That's roughly around $0.10. Okay. And then my second question is really broader on CytoSport. You highlighted that sales were down in the quarter but earnings were actually up. Could you give us some color going into the fourth quarter and into 2019 how we should think about that business?

James P. Snee -- Chairman, President, and Chief Executive Officer

Yeah. I mean, Farha, the team is hard at work. It's stabilizing that business. The big thing is what's happening in terms of the c store market and the ready-to-drink space. We need to gain back lost distribution. We've talked about getting that consumer message right. And the team is working hard on that. We also are pleased with what's happening in really the food, drug, and mass channel. Our take-home Tetra Pak drinks are growing really, really well. Our innovation is doing well. And so we expect in 2019 that we'll see some stabilization in the business but there's still work to do around that brand.

Farha Aslam -- Stephens, Inc. -- Analyst

Okay. So we're not going to see the fourth quarter recovery? Because I think we had previously anticipated top line growth in the fourth quarter because we're comping against a pretty easy comp.

James P. Snee -- Chairman, President, and Chief Executive Officer

Yeah. Farha, we were talking about earnings growth. We saw some of that in our third quarter, like we said, and we would expect to see that again in the fourth quarter.

Farha Aslam -- Stephens, Inc. -- Analyst

Okay. That's helpful. Thank you.

James P. Snee -- Chairman, President, and Chief Executive Officer

Thank you.

Operator

Our final question is a follow-up coming from Jeremy Scott from Mizuho. Please go ahead. Your line is open.

Jeremy Scott -- Mizuho Americas -- Analyst

Hey, thanks. I think that question was just answered. But the driver of Grocery Products margin decline in the fourth quarter, we would expect to see some benefit from lower commodity prices. So are we to assume that some of that's being reinvested in your advertising?

James P. Snee -- Chairman, President, and Chief Executive Officer

Yeah. I mean, we're making significant advertising investments in the GP business. Jeremy, the GP core business remains very strong, very healthy across the entire portfolio. The difficulty, the headwind really is -- we talked about contract manufacturing and then also that continued recovery of CytoSport.

Jeremy Scott -- Mizuho Americas -- Analyst

Right. Maybe just one follow-up on Fremont. So the product that you're currently producing today and selling fresh at Fremont, you're now going to turn around and be a customer of that product and you intend to produce it into value-added. At least, a portion of it. To what extent does that incremental demand for this new stream of value-added pork exist today? Or should we assume that you're going to be pushing a lot of this product on to the marketplace?

James N. Sheehan -- Senior Vice President and Chief Financial Officer

Well, as we've stated, we're a debt buyer of bellies and trim and we utilize all of our ribs. We utilize 100% of the product coming off of Austin for value-added products. There are some excess products coming off of Fremont. And we've had our stated goal, as we've stated in the past, our goal is not to sell any commodity meat at all. So as we expand our production, for instance, at Dold, as we expand our Natural Choice product lines, those commodity products now will go into value-added products.

Jeremy Scott -- Mizuho Americas -- Analyst

Got it. Thank you so much.

Operator

Thank you. That completes today's question-and-answer session. At this time, I will turn the call back to our host for any additional or closing remarks.

Nathan P. Annis -- Director of Investor Relations

Thank you all for joining us today. And a special thanks to all of our team members for their efforts as we wrap up our fiscal year and successfully deliver on our key results. Thank you.

Operator

Ladies and gentlemen, that will conclude today's conference call. Thank you very much for your participation. You may now disconnect.

Duration: 59 minutes

Call participants:

Nathan P. Annis -- Director of Investor Relations

James P. Snee -- Chairman, President, and Chief Executive Officer

James N. Sheehan -- Senior Vice President and Chief Financial Officer

Akshay Jagdale -- Jefferies -- Analyst

Ken Zaslow -- BMO Capital Markets -- Analyst

Eric Larson -- The Buckingham Research Group -- Analyst

Rupesh Parikh -- Oppenheimer & Co. -- Analyst

Michael Lavery -- Piper Jaffray -- Analyst

Jeremy Scott -- Mizuho Americas -- Analyst

Adam Samuelson -- Goldman Sachs -- Analyst

Robert Moskow -- Credit Suisse -- Analyst

Heather Jones -- Vertical Group -- Analyst

Farha Aslam -- Stephens, Inc. -- Analyst

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