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Hormel Foods Corporation (NYSE:HRL)
Q4 2018 Earnings Conference Call
Nov. 20, 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 Fourth 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 on Tuesday, November 20th, 2018. I would now like to turn the conference over to Nathan Annis, Director of Investor Relations. Please go ahead, Mr. Annis.

Nathan P. Annis -- Director, Investor Relations

Good morning. Welcome to the Hormel Foods conference call for the fourth quarter of fiscal 2018. We released our results this morning before the market opened around 6:30 AM Eastern. If you did not receive a copy of the release, you can find it on our website at hormelfoods.com under the Investors section.

On our call today is Jim Snee, Chairman of the Board, President and Chief Executive Officer; and Jim Sheehan, Senior Vice President and Chief Financial Officer. Jim Snee will provide a review of each segment's performance for the quarter and our outlook for 2019. Jim Sheehan will provide detailed financial results and further assumptions relating to our 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 AM today, Central Standard Time. The dial-in number is 888-254-3590, and the access code is 9962477. 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 35 through 41 in the company's Form 10-Q for the quarter ended July 29th, 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 fourth quarter and full-year operating performance. These non-GAAP financial measures should not be considered a replacement for and should be read together with our GAAP results. Discussion on non-GAAP information in addition to reconciliations to GAAP results are detailed in our press release located on our website. We will refer to these non-GAAP results as organic net sales, organic volume, adjusted segment profit, and adjusted earnings per share.

I will now turn the call over to Jim Snee.

James Snee -- Chairman, President & Chief Executive Officer

Thank you, Nathan. Good morning, everyone. Throughout the year we made significant progress toward our long-term vision as a global branded food company. With an emphasis on brand building, innovation, acquisitions, and intentional balance, our long-term approach allowed us to manage through difficult situations such as commodity market volatility, increased freight, and global trade uncertainty.

This year was marked by many milestones. We made the largest acquisition in our company's history with the purchase of Columbus Craft Meats, and we also successfully integrated both Columbus and Fontanini into our supply chain.

We reinvested a record amount of capital back into our company to increase capacity and improve efficiency. Major capital projects in 2018 included the (inaudible) Foods precooked bacon expansion and a highly automated whole bird facility. We also delivered many innovative new items to the marketplace. Items such as Herdez Guacamole Salsa, Natural Choice Snacks, Applegate Naturals products in the retail space, and Fire Braised Flank Steak for foodservice customers.

From a financial perspective, we delivered record sales, earnings, and cash flows -- 2018 also represented the 90th consecutive year of paying a quarterly dividend. Our strong financial results and confidence in the business allowed us to announce our 10th consecutive double-digit increase in the dividends for 2019, which will mark our 53rd consecutive year of dividend increases. By many measures, 2018 was a success. Refrigerated Foods made impressive contributions to our performance with significant growth coming from value-added brands in retail, deli, and food service.

However, there are areas of the business that did not meet our expectations. Jennie-O Turkey Store had another difficult year as they managed through continued oversupply in the turkey industry. And CytoSport had a disappointing year with declines in powder and single-serve ready-to-drink product lines. We are taking appropriate actions in both businesses and expect a return to growth in 2019.

Looking at the fourth quarter, we delivered record adjusted earnings per share of $0.51, a 24% increase. Many brands and product lines across all 4 segments drove growth. This effort was led by the success in Refrigerated Foods, who overcame significant commodity headwinds to deliver impressive results in all parts of their business. Our international team also delivered strong growth in the quarter, led by exports of branded products.

For the total company, sales increased 1% on a 1% decline in volume. The sales increase was driven by our Megamix joint venture and growth of branded products in Refrigerated Foods. The Fontanini, Columbus Craft Meats, and Ceratti acquisitions met our expectations for the year and contributed to the increase for the quarter.

On an organic basis, volume and sales declined 3% due to weakness in contract manufacturing and lower commodity markets. Refrigerated Foods grew volume 2% and sales 6%. Products such as Applegate Natural and Organic meats, Hormel Natural Choice products, Hormel Fire-Braised Meats, and Hormel pepperoni all delivered excellent growth this quarter. Sales also increased due to the Fontanini and Columbus acquisitions.

A reduction in hog harvest volume of 3% drove an organic volume decline of 2% and an organic sales decline of 3%. Pricing declined due to lower pork markets. Refrigerated Foods was able to deliver a 25% increase in profits, even as commodity profits declined 31%. The team was able to offset higher freight costs and higher advertising investments. I am particularly proud of how the Refrigerated Foods team continues to shift the portfolio toward branded, value-added products.

International sales increased 7% on volume growth of 5%. We saw strong sales increases on branded exports of products such as SPAM luncheon meat and Skippy peanut butter. The addition of the Ceratti business in Brazil also drove the sales increase. International segment profit increased 7% in spite of lower fresh pork exports and increased freight costs. Lower SG&A expenses also contributed to improved earnings.

Jenny-O Turkey store volume and sales declined 4%, primarily due to whole bird sales decline. As we mentioned on our last call, a portion of our whole bird sales were shifted to the third quarter to minimize cold storage expenses. Sales of Jenny-O lean ground turkey and premium deli items showed sales growth this quarter. Segment profit declined 31% due to lower whole bird prices, increased freight, and higher feed costs.

Grocery Products sales decreased 4%, as strong volume and sales growth of Herdez Salsa and Wholly Guacamole dips did not offset declines in our contract manufacturing business. Adjusted segment profit decreased 6% on lower sales and higher freight expenses.

This year we made excellent progress on our path forward that I laid out at our 2017 investor day. This included becoming a broader food company, expanding and accelerating food service, becoming a more global company, reducing volatility, divesting non-strategic assets, and modernizing our supply chain. We will continue to execute against these initiatives in 2019.

I anticipate a combination of external factors will impact our business this year. On one hand, we expect to benefit from lower pork input costs and a return to more normalized fundamentals in the turkey industry. On the other hand, we expect continued inflationary pressure in addition to commodity market volatility. Our team's ability to focus on the controllable elements of the business will help us manage through these challenges.

The quality and speed at which we are bringing innovation to the marketplace will be even better than it was in 2018. Our pipeline of innovative products will help us achieve our 15% by 2020 challenge. We made progress toward this innovation goal in 2018, as more than 14% of our sales came from products innovated in the last 5 years. In 2019, we expect continued growth from innovative products such as BACON 1 fully cooked bacon, Fire-Braised Meats, Natural Choice snacks, stacks, and wraps, and Herdez guacamole salsa.

The start of fiscal 2019 is also the official beginning of our new Hormel Deli Solutions division, which combines all aspects of our deli brands and businesses into 1 group within Refrigerated Foods. As we outlined at Cagney in February, this new division delivers an unmatched array of high-quality deli and prepared foods offerings marketed and sold through a direct sales organization. We are excited to help retailers create the deli of the future.

Looking at the segments for 2019, we expect all 4 business units to show sales and profit growth. The fundamentals in the turkey industry are showing slow improvement, with declines in poult placements and cold storage stocks. For the first time in over 2 years, we are seeing signs of consolidation within the industry. While we are encouraged by these factors, we continue to take pro-active steps to restore the growth of this business. Our expectations for this year is for a modest recovery in the turkey industry and earnings growth from Jenny-O turkey store. Commitments to control costs, optimize the supply chain, and investments in the Jenny-O brand will be important in 2019.

Similar to 2018, we expect an increase in branded value-added sales and profits in Refrigerated Foods. Growth will be led by our teams in food service, deli, and Applegate. Gains in our value-added businesses are expected to once again offset a reduction in commodity profits.

International is expected to have a strong year. Exports of branded products and gains in China and Brazil will offset continued declines in fresh pork exports. We see sales and earnings growth in grocery products coming from established brands such as SPAM and Skippy in addition to emerging brands such as Justin's, Wholly Guacamole, and Herdez. We also expect a meaningful contribution from the Muscle Milk brand.

Our supply chain is complex, and for many years we were able to capture incremental savings through grassroots projects known internally as best of the best. Since reorganizing our supply chain teams into one structure at the beginning of 2018, our teams have been thinking differently about ways to optimize procurement, manufacturing, and logistics. In 2018 the team was able to capture over $70 million in savings through a focus on in-sourcing production, better asset utilization, and more automation in our manufacturing facilities, all while managing the sale of our Fremont plant and dealing with higher freight costs. These results speak to our culture of corporate and personal accountability.

For 2019, our cost savings target is $75 million. Areas of opportunity cover the entire spectrum of our supply chain. We plan to use the savings to help offset inflation, reinvest into key brands, and contribute to earnings growth.

One macro-factor we are continuing to watch closely is freight. We saw a double-digit increase in 2018 and we expect another large increase in 2019. We remain focused on finding mutually agreeable solutions with our customers and, if necessary, increasing prices.

Taking all these factors into account, we are setting our full-year earnings guidance at $1.77 to $1.91 per share, and our sales guidance at $9.7 billion to $10.2 billion. This guidance reflects pre-tax and segment profit growth across all of our business units driven by strong retail, food service, deli, and international performance. As a reminder, we had a significant tax benefit in 2018 due to tax reform.

At this time, I will turn the call over to Jim Sheehan to discuss our financial information relating to the quarter and key assumptions for fiscal 2019.

James Sheehan -- Senior Vice President & Chief Financial Officer

Thank you, Jim. Good morning, everyone.

Fiscal 2018 was a record year for sales, earnings per share, operating cash flow, and dividends. Our financial strategy is aligned with our vision for the company. The balance sheet is strong and capital allocation decisions support the long-term growth strategy.

Volume for the fourth quarter was 1.3 billion pounds, a 1% decrease compared to 2017. For the full year, volume grew 1%. In the fourth quarter, sales were $2.5 billion, a 1% increase. Sales for 2018 were $9.5 billion, a 4% increase. Net earnings were $261 million, up 20% compared to last year. Full-year earnings were $1 billion, also a 20% increase. Adjusted earnings per share for the full year were $1.89, a 20% increase. In the quarter, we recognized a non-cash impairment of $17 million or $0.03 per share associated with the CytoSport business. The impairment was recorded in the grocery products segment.

For the year, SG&A excluding advertising was 7.2% of sales compared to 6.8 last year. The impact of acquisitions drove the increase. In 2019 we expect SG&A as a percentage of sales to decline as the company continues to focus on finding efficiencies throughout the organization.

For the year, advertising was $152 million compared to $136 million last year. We continue to shift investments between advertising and trade to attain the highest return. In 2019, we plan to use advertising to support such brands as SPAM, Hormel Pepperoni, Hormel Natural Choice, Columbus, and Jenny-O.

General corporate expenses increased in 2018 primarily due to higher employee-related expenses, including the universal stock option grant for all employees. For the full year, operating margins were 12.6%, 140 basis points lower than 2017. Higher freight in all segments and whole bird declines at Jenny-O contributed to the decrease. We expect operating margins to improve in 2019.

The full year effective tax rate was 14.3% compared to 33.7% in 2017. The decline was due to the Tax Cuts and Jobs Act passed December 2017. The effective tax rate for 2019 is expected to be between 20.5% and 23%. In 2018, we generated cash flow from operations of $1.2 billion compared to $1 billion last year. The primary use of cash was cap ex, the acquisition of Columbus, and dividends.

Capital expenditures for the year were $390 million, including the expansion of value-added capacity at (inaudible), and a highly automated whole bird facility. We anticipate capital expenditures to be $350 million in 2019. Major projects include the expansion of value-added capacity, investments to improve efficiencies, and expanded automation in our plants.

We paid our 361st consecutive quarterly dividend effective November 15th at an annual rate of $0.75 per share. We also announced the double-digit dividend increase. This is the 53rd consecutive we have increased the dividend and the 10th consecutive year we have increased the dividend at a double-digit rate. We repaid the remaining short-term debt associated with the Columbus acquisition in the fourth quarter, ending the year with $625 million in total debt. We remain in a strong financial position to fund other capital needs given our low level of debt and consistent cash flow.

Share repurchases for the full year totaled $47 million, representing 1.4 million shares. We will continue to repurchase stock to offset dilution from stock option exercises and based on our internal valuation. We continue to monitor supply and demand in the hog industry. We expect hog supplies to increase next year. Near-term volatility is heavily dependent on the progress of the new plants ramping up to full production.

Domestic pork prices have declined due to an abundant supply of protein on the market. We expect this to continue into 2019. Lower protein prices benefit our value-added businesses. We expect exports to be up 3% to 4% in 2019, however, the African swine fever outbreak in China could impact US pork exports. Input costs for the fourth quarter were generally lower. Hog prices were 16% lower than last year and well below the 5-year average. We expect slight increases to hog prices next year.

USDA composite values declined 9%. We expect USDA composite values to be lower in 2019. In 2019, our hog purchases will decline approximately 30%, reducing the exposure from the volatility of hog prices.

When the Fremont sale is final, we will be purchasing all hogs from the facility based on the USDA composite value. Included in our guidance is a decline in commodity profits due to the reduced harvest level and lower industry margins. Belly markets declined 11%, finishing below the 5-year average. Overall, we expect modestly lower belly prices and continued volatility in 2019. 72% pork trim prices were 14% below last year. We expect trim markets to be lower in 2019, especially in the first half. 50% beef trim was 9% higher. We expect beef trim prices to be flat next year compared to 2018. Feed costs were higher driven by soy meal. We expect feed costs to be higher in 2019.

Industry data shows turkey poult placements down 3% over the last 6 months. Cold storage of breast meat is 12% below 2017 but higher than the 5-year average. Despite improvements in both key drivers, recovery remains slow. Turkey commodity prices, including whole birds, pressured Jenny-O results in 2018 despite higher breast meat prices. Whole bird prices were 15% lower than last year. The multi-year lows will persist through this calendar year. Whole bird prices next year will be impacted by Thanksgiving volume. Breast meat prices were 33%% higher. We expect higher breast meat prices in 2019.

As Jim discussed, we created a new deli division within Refrigerated Foods. As a result, beginning in 2019, we will report Jenny-O deli results within the Refrigerated Foods segment. Actual deli sales and profits, including an allocation of supply chain profits, will be transferred from Jenny-O to Refrigerated Foods. The size of the deli business moving from Jenny-O to Refrigerated Foods is approximately $300 million in sales with margins in line with the Jenny-O segment. The company will restate the segment results beginning in the first quarter of 2019.

The sale of the Fremont plant to WholeStone Farms is scheduled to close in December. We will incur approximately $12 million of expenses in the first quarter to move value-added equipment out of the facility and various pension-related expenses. In 2018, the team demonstrated an ability to manage through various market factors and volatility. We are confident in the plan for 2019, and our strategy for delivering long-term value to shareholders.

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

Questions and Answers:

Operator

And if you would like to ask a question, please signal by pressing *1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment.

Again, press *1 to ask a question. And we'll take our first question from Michael Lavery with Piper Jaffray. Please go ahead.

Michael Lavery -- Piper Jaffray & Co. -- Analyst

Morning. Thank you.

James Snee -- Chairman, President & Chief Executive Officer

Good morning, Michael.

Michael Lavery -- Piper Jaffray & Co. -- Analyst

Can you help clarify a little bit about how we should think about the supply chain savings? You've talked about the $75 million, but it doesn't seem like it includes any more bigger more restructuring type savings. Is that something that should be likely down the road? Or what's the right way to think about that?

James Snee -- Chairman, President & Chief Executive Officer

Sure. I think that the best way to think about it, Michael, is, you know, we started off the year saying the thing that we had to get right was the structure and the process, right? And making sure that we could identify, capture, validate, and strategically reinvest the savings. So, the team is thinking differently as we look to optimize procurement, manufacturing, and logistics. And certainly, 2018's keen focus on labor, overhead, supplies, and of course, let's not forget the fact that we put them in the middle of the freight increases and the Fremont divestiture.

So, they've had a lot going on. 2019 will have some of the same, but I will tell you that they're also starting to pivot toward the bigger and more structural things. So, an example of that would be as the baseline for freight has probably shifted over the long-term, is making sure that we have the most optimized network possible.

And so, what does that look like for distribution centers? How do we travel fewer miles over the long-term? So, yeah, we are getting to those bigger, more structural issues, but right now it is a combination of some of the short-term and long-term things.

Michael Lavery -- Piper Jaffray & Co. -- Analyst

And your numbers for '19, could that have upside as you get into some of these projects later in the year? Or do you have a pretty good set amount of visibility and those would be further down the road?

James Snee -- Chairman, President & Chief Executive Officer

Those would be a little further down the road. I mean, for us it's what is realistic so that we know it's disciplined and thoughtful. And we'll know more as we get closer.

James Sheehan -- Senior Vice President & Chief Financial Officer

The other item I'd add, Michael, is that the $75 million we're talking about excludes any previously announced synergies that we have in our acquisitions.

Michael Lavery -- Piper Jaffray & Co. -- Analyst

Okay, great. That's helpful. Thanks a lot.

Operator

And we'll take our next question from Robert Moskow with Credit Suisse. Please go ahead.

Robert Moskow -- Credit Suisse Securities (USA) LLC -- Analyst

Hi, thank you.

James Snee -- Chairman, President & Chief Executive Officer

Hi, Rob.

Robert Moskow -- Credit Suisse Securities (USA) LLC -- Analyst

A couple of things on the guidance I was curious about. What is -- is that the sales guide is pretty lofty, especially in light of the fourth quarter numbers being below expectations, particularly on price. Can you give us a little more color on how you got there? And are you expecting some price recovery in the commodity markets in order to get there?

And then, secondly, on the guide you said that you thought hog prices would be up but that the composite would be lower for '19. And I wanted to know how you got that assumption, as well.

James Snee -- Chairman, President & Chief Executive Officer

Sure, so I'll go ahead and start, Rob. As we've looked across the different segments, we've looked at the sales guide as realistic. You know, when we think about grocery products coming off of a weaker Q4 and really the driver there was the fact that we did have some incremental sales in Q4 of '18 -- we didn't have in '18 that we did have in '17. But we think we're set up really well because the baselines for our GP business are very healthy. So, heading into 2019, we expect that business to show mid-single digit growth.

Refrigerated Foods is a lot more of the same in terms of the value-added growth that we expect to see. We're not expecting anything crazy in JOT. We've got a low single-digit increase there which we believe is very achievable. And then our international growth on the top line is really in line with our historic expectations of high single-digits. So, I do believe the guide on the sales is very realistic and achievable and maybe I'll let Jim give you a little more color and on your other question.

James Sheehan -- Senior Vice President & Chief Financial Officer

Good morning, Rob. We expect the hog industry to be similar to the structural makeup of 2018, including the supply growth and the volatility based on the capacity coming online. Hog prices right now are low but we expect them to be up in the low single digits. Regarding the spread, we expect the higher supplies of meat that will be available because of the additional capacity coming online will lower the commodity prices, including we expect, bellies and trim to both be down in 2019.

Robert Moskow -- Credit Suisse Securities (USA) LLC -- Analyst

Okay. And have you put in any kind of assumptions for China's hog herd disease issues and what that might mean for American exports. Is that a positive or a negative, or too soon to tell?

James Snee -- Chairman, President & Chief Executive Officer

It's really too soon to tell. And I would tell you, Rob, we have limited African swine fever risk assumed in this plan because of exactly what you said, right? It's a risk to the China business, but potentially an opportunity for our pork export business. We do believe that if it is a risk to China that we'll be able to take some pricing in line with the rest of the market. But it is, really, too early to tell but we're watching it. It's certainly on our radar like I'm sure it is everyone else's.

Robert Moskow -- Credit Suisse Securities (USA) LLC -- Analyst

Thanks. I'll get back in queue. Thanks.

Operator

And we'll take our next question from Thomas Palmer with JP Morgan. Please go ahead.

Thomas Palmer -- JP Morgan -- Analyst

Good morning. Thanks for the questions. I wanted to ask -- I just wanted to ask about the first quarter setup. In the past, you provided some commentary and the cues here on the call on kind of how you're seeing margins or EBID overall trend across the different segments. I was hoping you could provide that here again on the first quarter setup.

James Snee -- Chairman, President & Chief Executive Officer

Yeah, so we haven't really done that so much by quarter. You know, last year we talked a little bit about JOT just because of the unique situation we were in and the recovery was heavily skewed to Q2. I would tell you or I would guide you to the couple of things that we have called out for Q1 that will impact the business, as we did have the benefit last year of a megamix tax credit and then you heard in Jim Sheehan's comments the fact that we will have some Fremont closing expenses in Q1. So, obviously, you're going to have that as a headwind early in the year.

Thomas Palmer -- JP Morgan -- Analyst

Okay, thanks. And just to follow up on that -- on the Muscle Milk side you mentioned meaningful contribution for the year. Is that both top and bottom? And could you maybe talk about what you're already seeing in that business in terms of its inflection?

James Snee -- Chairman, President & Chief Executive Officer

Yeah, so that would imply top and bottom line growth from the Muscle Milk business. And again, we've talked about several different components. The part of the business that has grown throughout the year and continues to show growth is really the take-home or the muscle-tech (inaudible) business. You're seeing that in more traditional food-drug en masse as they expand out their sports nutrition category. That business has been healthy and will continue to be in 2019. We've seen recovery in the ready-to-drink space, so we saw growth in the back half of the year like we had said we would. And we expect that to continue in 2019.

The area of the business that continues to be under pressure now is the powder business, and really the driver there is just that shift from the traditional brick-and-mortar specialty channel into more online business. And we've spent time and effort and resources building up that muscle or that digital competency that supports the e-commerce business.

Thomas Palmer -- JP Morgan -- Analyst

Okay. Thank you.

Operator

And we'll take our next question from Akshay Jagdale with Jefferies. Please go ahead.

Akshay Jagdale -- Jefferies LLC -- Analyst

Good morning. Thanks for the question. I wanted to ask about the grocery -- sorry, about the turkey business. Obviously, there's been headwinds from the industry and commodity pricing, but can you -- as you've gone through the cycle which has been quite long, can you talk about, maybe help us dimensionalize the company-specific issues cost wise that you think you can address going into next year? I mean, when you go through a down cycle I'm sure you've tightened the belt a little bit more, but there was also some specific cost issues in your grow-out division, right? So, can you help us put into context where we are in Jenny-O turkey margins? And how much of the underperformance is industry versus company-specific, high level?

James Snee -- Chairman, President & Chief Executive Officer

I think the key driver in jobs is that we need better fundamentals in the industry. And that really is what is going to get us where we need the business to be. And so, we've seen some of that happening, but we're still disappointed in the pace and so as we're looking into 2019, we are just projecting modest growth. But in that modest growth, we know that we'll continue to outperform the industry.

And so, in some of the areas that you mention, Akshay, we continue to have a key focus on bio-security for our facilities to make sure we can avoid another avian influenza outbreak. You know, we had talked about the work that we're doing in the raised-without-antibiotics initiative and our team continues to make progress and they're making it more efficient and cost-effective. Clearly, they're impacted as much as anyone on the freight side of the business, and so that's not unique to them. And that's really a companywide initiative on how can we find those mutually agreeable solutions with consumers while still working in the long-term to optimize our network.

And the other part is, we see it as a business that continues to be on trend. We invested in the brand this year. We'll be reinvesting in the brand again in 2019 as we know turkey is on trend. And so, we have to continue to outperform the industry and we think the things that we've done put us in a position to be poised to accelerate our performance or our out-performance versus the industry.

James Sheehan -- Senior Vice President & Chief Financial Officer

Akshay, one item that I would add is that we're very excited about the new Melrose plant coming online in the spring. That's a state-of-the-art plant that will really take our efficiencies to a new level, so that will, as Jim said, the business has outperformed the industry for a long time. This is going to allow us to increase that outperformance.

Akshay Jagdale -- Jefferies LLC -- Analyst

Okay, and just one follow-up on what Rob was asking about, but maybe in a different way. Looking through your segments, your business is so unique with the exported commodity meat prices that it's hard to really tell what's happening with true price, right? So, can you, high level, give us a sense of what you're seeing pricing-wise as it relates to freight cost being up and overall sort of food industry inflation has picked up. And so, you feel like all the companies are talking about taking pricing, but what's your take on where we are in that cycle? Are you finding more success now than 6 months ago? Or how would you characterize the environment?

James Snee -- Chairman, President & Chief Executive Officer

Right. I think we're no different than anybody else in that we're looking at all of these macro factors. So, whether it's African swine fever or freight, tariffs, export -- it's clearly a dynamic situation. And we continue to look at it really on a category by category basis, so Refrigerated Foods and jobs are more market based, closer to the market. And so, you do have pricing that will move a bit more frequently. You know, GP pricing really is less market-driven and impacted by the macro issues that we're talking about. And so, we took pricing late '17, early '18, and we are looking at it on a category by category basis and we don't just look at pricing.

We're taking that holistic view of each of our brands and each of our categories to understand the levers in regards to trade other revenue growth management initiatives and obviously making sure that we understand the corresponding projected elasticities. And I guess I would leave you with the fact that pricing is never easy, never has been, don't think it ever will be. But the fact that we have No. 1 and No. 2 brands also puts us in a very solid position to make sure that we are taking those leadership roles.

Akshay Jagdale -- Jefferies LLC -- Analyst

Okay, and just one last housekeeping one. The guidance for next year order of magnitude in terms of the profits that will be gone as a result of the Fremont deal, is it roughly still -- I forget, but did you say $10 million? I mean, I know the cost is 12, but what's the profit contribution, roughly, that you're assuming will not be in the P&L next year?

James Sheehan -- Senior Vice President & Chief Financial Officer

We discussed in the script that commodity profits will be down 40% from this year and a major portion of that is the Fremont plant -- the sale of the Fremont plant. But we also expect that the margins on those, or the spread on those hogs are going to decrease during the year. So, I think it's a combination of both.

Akshay Jagdale -- Jefferies LLC -- Analyst

Thank you. I'll pass it on.

James Sheehan -- Senior Vice President & Chief Financial Officer

Thanks, Akshay.

Operator

And we'll take our next question from Eric Larson with Buckingham Research Group. Please go ahead.

Eric Larson -- The Buckingham Research Group, Inc. -- Analyst

Yeah, good morning, everyone. Thanks for taking my question. I think I know the answer to this -- just want to make sure. It's a little follow-up on the guidance question, but the expenses that you outlined that will probably come in Q1 if the sale of Fremont happens in December, I'm assuming that those expenses are included in your guidance. They're not excluded, so I'm assuming it's a GAAP number. Is that a fair assumption?

James Sheehan -- Senior Vice President & Chief Financial Officer

That's a fair assumption, Eric.

Eric Larson -- The Buckingham Research Group, Inc. -- Analyst

Okay. And then the second question, which I want to sort of follow up on here, is -- we saw the impairment charts for CytoSport in the quarter. I think Jim talked a little bit about the issue of sales moving more toward the e-commerce side of the business, but is this a business that you're still putting a fair amount of advertising support behind it? Is that the only fix that you need? Or what else in the powder side, and I think it's also so wildly competitive, but what else sort of needs to happen for CytoSport to kind of get back on track?

James Snee -- Chairman, President & Chief Executive Officer

You know, one of the things, Eric, that I called out was as those sales have shifted -- and we were behind the curve in terms of having the digital infrastructure that we needed. And so, that has been a big initiative for us and we feel like we're in a position now where we have the appropriate content and sales infrastructure that we need.

From an advertising perspective, the team that we have in place has reallocated some of those advertising dollars into slightly different messaging which we're finding to be highly effective. And so, I think those were really two of the bigger things that we had to get done and we're well positioned for 2019.

Eric Larson -- The Buckingham Research Group, Inc. -- Analyst

Okay, thanks. Happy Thanksgiving to all.

James Snee -- Chairman, President & Chief Executive Officer

Yes, same to you.

Operator

And we'll take our next question from Adam Samuelson with Goldman Sachs. Please go ahead.

Adam Samuelson -- Goldman Sachs & Co. LLC -- Analyst

Yes, thank you. I guess the first question in Jenny-O -- I think it talks about modest profit improvement for fiscal '19. Can you talk about the path to recovery here? I mean, it looked like some of the market indicators are moving in the right direction in terms of breast meat pricing being above $2, in terms of poult placements being down, a competitor potentially shutting down early in the near year. And yet, still only calling for a kind of modest profit improvement. You'd almost think about the path to getting back to those kind of mid-teens margins that this business did pre-avian flu?

James Sheehan -- Senior Vice President & Chief Financial Officer

Sure, and I think you touched on it. It's really the fundamentals are moving in the right direction. I think that the biggest issue there is just really the disappointment in the pace. And so, even though the trend in the last quarter was down for poult placements, if you look at October it was actually up a little bit. So, you know, I think we've got to stay on track with those fundamentals and see them accelerate. I mean, your correct in regards to breast meat pricing. We see that as a positive. We see inventory levels coming down. Certainly, that's a positive, but again, still at historically high levels. So, we need to see that accelerate.

We'll continue, as we've said several times, we'll continue to outperform the industry and the things that we're doing behind the scenes really help us be poised to accelerate the outperformance. But to get back to truly more normalized levels we need to see the fundamentals accelerate.

Adam Samuelson -- Goldman Sachs & Co. LLC -- Analyst

Okay, and then my second question is, over in Refrigerated Foods the organic volume in the quarter were down 2%. You attributed that to lower hog harvest levels. At what point does the organic volume trajectory in Refrigerated kind of disconnect from hog harvest? Just trying to think about kind of layering in Columbus and Fontanini as they glare into organic through or after the first quarter. At some point, you need to be growing this on the volume side. Is the new capacity that you've put in, I mean, does that happen sooner? Or just help us think about the path, actually, as you're starting to grow the volumes here organically.

James Sheehan -- Senior Vice President & Chief Financial Officer

Yep. That's a great question, Adam, and I think 2019 is the year that you'll see that, where it will be the investments that we've made in those businesses that are driving volume sales and earnings growth. So, we see that across the board. We've been very intentional in terms of the investments to support that value-added business, and 2019 is the year that you'll see that really connect.

Adam Samuelson -- Goldman Sachs & Co. LLC -- Analyst

Okay. I appreciate the color. Thanks.

James Sheehan -- Senior Vice President & Chief Financial Officer

Thank you.

Operator

And we'll take our next question from Benjamin Theurer with Barclays. Please go ahead.

Benjamin M. Theurer -- Barclays Capital -- Analyst

Hi, good morning Jim and Jim. So, first of all, congratulations to the good close of the year. And now, a question on the daily business. And you've mentioned you're going to move what you basically had within the Jenny-O turkey up into the Refrigerated Foods segment. And you've nicely associated the sales volume as well as the profitability. Now, the question is for the whole restructuring and bringing that together, are there any additional costs we should be aware of that you're going to incur just by consolidating that business? And if you could share what is the size of the business. Is it -- at some stage, you would consider to actually spin it off from the Refrigerated Foods segment and report it on a stand-alone basis. But just to get a little more magnitude of this business, that would be my first question.

James Sheehan -- Senior Vice President & Chief Financial Officer

Sure. Well, first of all, thank you for the recognition and a strong performance. We appreciate that.

In regards to the deli business, we don't have any other expenses that we're expecting in 2019 and beyond, as we've consolidated this business. So, for us, the bigger issue that most of the work was done in 2018 really bringing all of these businesses together and integrating them behind the scenes. There was a lot of work that took place. And so, as we set off into fiscal 2019 really being able to stand up this organization and have them ready to go is exciting.

In regards to the last part of your question, we've said it. It's about a billion-dollar business and haven't really given any thought into splitting it off or anything like that. Because it is so closely linked and tied to Refrigerated Food, it makes perfect sense to have it there. And really, the focus now is achieving and doing what we said we were going to do and making sure that it's A. our next growth engine, and really helping retailers create the deli of the future to capitalize on that opportunity.

Benjamin M. Theurer -- Barclays Capital -- Analyst

Okay. Perfect. So, it's going to be -- so basically $1 billion -- that's with the $300 million that comes in from Jenny-O, correct?

James Sheehan -- Senior Vice President & Chief Financial Officer

Yep.

Benjamin M. Theurer -- Barclays Capital -- Analyst

Okay. And then, a last -- on the international part. Clearly, their sales was strong-driven. Could you give a little bit -- update on how the Brazil acquisition is doing with Ceratti brand? How you've been doing? How the competitive environment has been doing? Because what I've seen is that, at least in some of the prepared food side business, we've seen major competitors being relatively aggressive on increasing pricing. So, wanted to get your exposure there and how you were able to benefit from that environment. Thanks.

James Snee -- Chairman, President & Chief Executive Officer

Yep, absolutely. So, the Ceratti acquisition has met all of our expectations and, as we've said, it's really given us a great entry point into the Brazilian market. In 2018, we did take some pricing down there as they've had some macro issues around inflation, but we've been able to successfully pass along pricing. A reminder that the brand is a premium value-added brand, very well recognized by Brazilian consumers. And so, it mirrors a lot of what we have here in the United States in terms of it being a premium authentic high-quality artisanal brand that resonates with consumers.

So, business is meeting all our expectations. We're in the midst of continuing to make sure we're innovating, adding capacity to capitalize on the growth opportunities that are down there.

Benjamin M. Theurer -- Barclays Capital -- Analyst

Okay. Perfect. Thank you very much. I'll leave it here.

James Snee -- Chairman, President & Chief Executive Officer

Thank you.

Operator

And we'll take our next question from Jeremy Scott with Mizuho. Please go ahead.

Jeremy Scott -- Mizuho Securities USA LLC -- Analyst

Hey, good morning.

James Snee -- Chairman, President & Chief Executive Officer

Hi, Jeremy.

Jeremy Scott -- Mizuho Securities USA LLC -- Analyst

So, just wanted to clarify on Refrigerated Foods guidance being up next year. So, this -- just wanted to clarify -- this includes the $15 million to $20 million in closing costs, which I think is what you estimated last quarter. It includes the estimated $10 million decline in commodity profits, but it doesn't include the reconciliation of, let's say, $35 million, $40 million in JOT's business being reclassified into Refrigerated Foods.

So, is your guidance implying that there's something in the range of $65 million to $75 million in organic operational improvements in fiscal '19?

James Snee -- Chairman, President & Chief Executive Officer

I think it's fair to say everything that you've talked about is included in the growth that we're looking for in 2019. I think the $12 million is going to be in general corporate, but it's reflected in our overall number. But I think the other elements that you're talking about really are reflected in Refrigerated Foods and it will be another strong for them. And, Jeremy, I guess if there's any more specific detail that you need, certainly Nathan can be available to give you those answers.

Jeremy Scott -- Mizuho Securities USA LLC -- Analyst

Okay, got it. But just wanted to make sure that the Jenny-O reclassification is or isn't included in your guidance of Refrigerated Foods being up next year.

James Snee -- Chairman, President & Chief Executive Officer

Yes, so that is now --the Jenny-O business has shifted into our deli organization, which is now included in Refrigerated Foods. So, we are essentially rebasing Refrigerated Foods to reflect that, if that makes sense.

Jeremy Scott -- Mizuho Securities USA LLC -- Analyst

Got it. Yeah, that it does. And then, help me expand on the pre-Fremont, post-Fremont dynamic in Refrigerated. I think you said commodity profits would be down, hog harvest would be down, but given your contract, there would be no impact on volumes, right? So, can you clarify what percentage of the tonnage that you will be buying from WholeStone under contract that will effectively be passed through? Or, in other words, the part that you don't turn into value-add, the green hams and their equivalents, just quantify that if possible. And within that, are there products that you're going to be entirely passing through? And will there be products that you don't necessarily add value on but you'll earn a spread because you're locked into contracts with a customer and you're getting (inaudible) there?

James Sheehan -- Senior Vice President & Chief Financial Officer

So, we will take all of the meat coming off of the Fremont line. Some of that meat will go into our value-added products. Some will be sold as fresh pork. We retain all margins on fresh pork sales, so we're purchasing the meat at the USDA composite carcass value. So, the spread between the carcass value and the sale into either the retail or the provisions market belongs to Hormel.

So, we're taking down our harvest by 30% and as we see it, with the additional capacity coming online, this is exactly why we've made the move to sell Fremont. It de-risks the Refrigerated Foods business and that is the structure.

Jeremy Scott -- Mizuho Securities USA LLC -- Analyst

Okay. I guess I'll follow up with Nathan on that. And just maybe lastly, on the 12% dividend hike into your guidance --so a solid acceleration in the payout ratio is not entirely off trend given what you've done in the past decade. But just curious, what was the rationale for leaning into the payout in 2019, and should we be interpreting that as a recalibration, however slight, of how you're thinking about M&A opportunities that may be at your doorstep?

James Snee -- Chairman, President & Chief Executive Officer

Well, I think the biggest driver, obviously, is the strong cash flows of our business. Strong cash flows and clearly, the balance sheet remains as a strength for the organization. You know, this is consistent with what we've done over the last decade. So, not only the strong cash flows but the optimism that we have in our business going forward. So, as we head off into 2019 and beyond, clearly the dividend is one of the levers when we think about capital allocation. But we are in a very, very strong position to make any acquisition that we think is appropriate and strategic for us.

Jeremy Scott -- Mizuho Securities USA LLC -- Analyst

Great. Thank you.

Operator

And we'll take our next question from Heather Jones of Vertical Group. Please go ahead.

Heather Jones -- The Vertical Trading Group LLC --Analyst

Good morning. Thanks for taking the question. Real quick on your comments on freight, so some of the other companies in the industry are talking about not lower freight in 2019, but honestly more benign commentary on the outlook than what you articulated. So, I was wondering if you could --are you envisioning inflation similar to what you saw in '18 on the freight side?

James Snee -- Chairman, President & Chief Executive Officer

Hi, Heather. I think that it's going to be a little lower than we saw in fiscal year 2018. I mean, we believe that there's still pressure but there's a bit more balance in the marketplace now that the freight lines have had time to work on it. Certainly, we've spent time working on it. So, yeah, I don't want to overstate it, but certainly, it's a headwind in 2019 and, again, it really goes back to this longer-term solution that our supply chain team is working on. And what is the right network optimization for us?

Heather Jones -- The Vertical Trading Group LLC -- Analyst

Okay. And then on advertising, so you guys talked about a 20% for '18. It came in below that and I think you made some comment about shifting it into other types of promotion that you found more effective. Could you help us? Give us a sense about what you're thinking about advertising dollars in '19 as far as year-over-year increase?

James Snee -- Chairman, President & Chief Executive Officer

Yeah, absolutely. So, at the end of the first quarter what I said was that we would increase our advertising in promotional spending in the neighborhood of 20%. And as you know, we're always working to find the highest ROI between all methods of brand support. And while advertising was significantly ahead of last year --good strong double-digit increase, it was below that 20%. But we did see our trade dollars come in above planned by an equal amount.

So, we hit the number that we thought we would. And it does ebb and flow in terms of how we spend those dollars across brands and dollars. The real message here is that we're dynamically managing this brand support for the highest ROI. And we spend a lot of time around revenue growth management, pricing, trade, advertising --all those things.

So, we feel good with what we said and what we ended up spending, and then we are going to have a slight increase in 2019 and in Jim Sheehan's comments, you know, he talked about some of the brands where we'll be spending those dollars. We'll continue to support the SPAM brand. We've just --you know, they're coming off their 4th consecutive record year and it's a brand that we know responds well to advertising. We've spent a lot of time and effort and dollars under our umbrella brand Natural Choice, and of course, the reinvestment in the Jenny-O turkey store business.

So, we feel like our investments are giving us the returns that we need, whether they're advertising or trade.

Heather Jones -- The Vertical Trading Group LLC -- Analyst

Okay, thank you. Have a Happy Thanksgiving.

James Snee -- Chairman, President & Chief Executive Officer

Yes. You, too, Heather.

Operator

And we'll take our final question from Robert Moskow with Credit Suisse. Please go ahead.

Robert Moskow -- Credit Suisse Securities (USA) LLC -- Analyst

Hi. Just a couple things to clear up. Freight --can you give us a sense of what the dollar inflation was in fiscal '18, just to get a sense of the headwinds just all in all? Second, bellies. Belly prices, I think, started pretty low in the quarter and then were rising. Were you hedged on bellies? Did you get a really strong bacon margin in the quarter? And do you expect that to kind of ease off in first quarter just because of the slope of the curve going higher? Maybe give us a little more clarity on what those bacon margins look like. Thanks.

James Sheehan -- Senior Vice President & Chief Financial Officer

The freight was $0.60 in 2018. Belly market, as I said, we think that we will see volatility and we have seen volatility this year in bellies. We do not have a hedge on bellies right now. We still believe that they're going to be lower over the year and I'll let Jim talk a little bit about the margins on the bacon.

James Snee -- Chairman, President & Chief Executive Officer

Yeah, so Rob, our bacon business was very strong and it kind of ties into my previous answer in terms of really, you know, where's the biggest ROI in terms of pricing or trade? And so, we navigate through that, but I would tell you that we're very pleased with bacon performance for the year, for the quarter, both top line and bottom line.

Robert Moskow -- Credit Suisse Securities (USA) LLC -- Analyst

Okay, last question. Corporate expense --it was like $60 million this year. I think it's twice as high as the year before. Should we expect it to be similar in fiscal '19? I didn't catch that.

James Sheehan -- Senior Vice President & Chief Financial Officer

Well, we'll have the $12 million from the closing of the Fremont sale incorporate expenses, so that will put pressure on increasing the corporate expenses.

Robert Moskow -- Credit Suisse Securities (USA) LLC -- Analyst

So, something in the mid-seventies then, Jim?

James Sheehan -- Senior Vice President & Chief Financial Officer

No. We don't see them that high.

Robert Moskow -- Credit Suisse Securities (USA) LLC -- Analyst

Okay. Well, we don't have to play bigger-than-a-breadbox. I'll get off the queue. Thanks.

Operator

And there are no further phone questions at this time. I would now like to turn the call back over to Jim Snee for any additional or closing remarks.

James Snee -- Chairman, President & Chief Executive Officer

Great, thank you. On behalf of the team here at Hormel Foods, thank you to all of you for joining us today. To our team members listening in, thank you for all your tireless work that allows our company to be so successful in the marketplace. Your focus on delivering our key results and maintaining our culture of accountability will continue to make this company uncommon in the marketplace.

Have a safe and happy Thanksgiving.

 

Operator

 

And this concludes today's call. Thank you for your participation. You may now disconnect.

Duration: 65 minutes

Call participants:

James Snee -- Chairman, President & Chief Executive Officer

Nathan Annis -- Director, Investor Relations

James Sheehan -- Senior Vice President & Chief Financial Officer

Michael Lavery -- Piper Jaffray & Co. -- Analyst

Robert Moskow -- Credit Suisse Securities (USA) LLC -- Analyst

Thomas Palmer -- JP Morgan -- Analyst

Akshay Jagdale -- Jefferies LLC -- Analyst

Eric Larson -- The Buckingham Research Group, Inc. -- Analyst

Adam Samuelson -- Goldman Sachs & Co. LLC -- Analyst

Benjamin M. Theurer -- Barclays Capital -- Analyst

Jeremy Scott -- Mizuho Securities USA LLC -- Analyst

Heather Jones -- The Vertical Trading Group LLC -- Analyst

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