Smithfield Foods Inc (SFD) 2002 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Smithfield Foods' first-quarter earnings call. At this time, all participant lines are in a listen-only mode. Later, there will be questions and answers. Instructions will be given at that time. If you should require assistance from an operator during the conference, please press zero, then star.

As a reminder, the call is being recorded, and will be available for replay after 12:30 p.m. today until August 29th at midnight.

You may access the replay service at this time at the following number: 1-800-475-6701 and entering the access code 649498.

I would now like to turn your conference over to your host, Mr. Jerry Hostetter. Please go ahead, sir

Good morning and welcome to a conference call to discuss Smithfield Foods' fiscal year 2003 first-quarter results. We would like to caution you that in today's call, there may be forward-looking statements within the meaning of federal securities laws. In light of the risks and uncertainties involved, we encourage you to read the forward-looking information section of the Smithfield Foods Form 10-K for fiscal year 2002.

With us today are Dan Stevens, chief financial officer, Richard Poulson, executive vice president and senior advisor to the chairman, C. Larry Pope, president and chief operating officer, and Joseph W. Luter III, chairman and chief executive officer. This is Jerry who is at the timer, head of investor relations.

Larry Pope will begin our presentation with a review of operations. Larry?

Good morning, ladies and gentlemen. Unfortunately this first quarter is a disappointing quarter for Smithfield Foods at the bottom line. I would like to review with you briefly the P and L and then discuss some of the business issues.

Given that the P and L is down, we are disappointed in the bottom line, but there are an awful lot of pieces of the business, given the industry conditions, that we're dealing with, that we are very pleased about.

At the top line, the company's gross sales increased 22% from a billion six to 2 billion. Our gross profit - our gross profit percentage dropped from a little over 15% to 11%, and that's the - that's the line item, the cost of sales, where our hog production results generally, or the vast majority of those costs, flow through.

Our general - our selling, general and administrative expenses are up significantly, primarily reflecting the addition of the beef operations of [Packerland] and a portion of Moyer was not in all of last year, as well as the initiative the company has taken on the sales and marketing front to - in our northeast and Chicago markets to boost the company's brand equity and our Lean Generation. Those costs are flowing through that line.

Depreciation expenses up significantly, primarily related to the acquisitions. Interest expense reflects the addition of the debt associated with our acquisitions.

So that's a brief overview. Clearly, our net income and our pretax profits are down more than 75% from last year. You will note that - you will note that the company did have approximately - approximately 5% more outstanding shares, so that impacted the EPS calculation.

With that being said, I realize you can - you can read and understand the P and L pretty clearly and I won't focus on that. As you have questions on the financials, I'll refer those to the participants.

What I would like to do at this point is go through some of the causes of the results declining from 56.9 million at the bottom line to 11.8 this year.

Some positive points, the beef division of the company had an exceptionally good quarter. We have added, as you are aware from our releases, [Packerland] we acquired the middle of last - middle of last fiscal year. The decision shortly after that was to merge our existing beef operations, Moyer, into [Packerland] and to form a new beef division, and I would tell you that I could not be more pleased with the merger that has occurred and the management talent that we acquired through [Packerland] and the effort that Rich Vesta who runs our beef division has brought to that end of the business. When Rich - when Rich became part of the organization, he made the comment that our Moyer operation in his mind, which was losing our last year, if you saw in our segment information, our beef division lost money in the first quarter of last year, Rich made the comment that he thought the Moyer operation would be the company's most profitable operation.

I'm pleased to say this morning for the past three months, the Moyer operations have been the most successful, the most profitable plant, of all of our four beef - we've got four four primary beef locations. Moyer has been the most profitable. Rich and his team have just done a tremendous job of managing the beef end of this business, an area that we are just beginning from a senior management level to understand this business. We've - I believe we have acquired some very, very strong talent there, and I couldn't be more pleased with the job he and his people have done and the expertise and what I think they'll be doing for us as we probably go into a tougher beef cycle. I think we have the management people in place to address - to address these issues and manage us through the good times and the bad times and I want to say that, for the record.

Now, the big issue clearly we've been impacted, just like the rest of the industry, on the hog production side, where the average price of hogs has dropped $15 a hundred weight this quarter compared to the same quarter last year, and just as the releases have come out on everybody else from Seaboard to premium standard to IBP and Hormel, we've all been impacted. We've all been impacted by this - by this downturn in live hog prices, which, unfortunately, may continue for the remainder of this calendar year.

With that being said, the drop in live hog prices, if you do the math of multiplying the $15 a hundred weight times the 200 and - sort of average 260-pound hogs that we process times the 3 million hogs that we market, I think you'll - your math will indicate that our losses, while down just slightly over a hundred million dollars, that the - that the pricing impact alone is approaching $120 million, between 115 and 120, and so the point I would want to make there to those listening is that the merger that we did about a - about 16 months ago to merge our farming operations into one group, into Murphy Brown, has gone extremely well. I've mentioned on previous conference calls the fact that I thought Jerry Godwin heading up that group and the management talent in that group and that organization is, I believe - feel very confidently that we've got the best talent on the production side in the industry.

Jerry indicated that he would be able to achieve some significant savings in the transportation and logistics and feed manufacturing as well as coordination efforts with the meat packing plants here to achieve some cost reductions, some significant cost reductions, and to lower our costs and improve our competitiveness, although I believe that we are extremely, extremely efficient producers. Jerry has taken that - he and his management team have taken that to a new level. And so that is the reason that our losses that you - that we have - or the decline - we're still showing a profit in our hog production operation, but the decline in profitability in hog production is not nearly as severe because we are reaping the benefits of that merger and those synergies that Jerry thought very clearly he could accomplish. Jerry is very, very - very, very committed, he and the management team, and they are managing as well those costs, sort of checking every dollar as the - and managing every operation and looking at every operation.

So from a hog production side, I think while we can't - we can't control livestock prices, what we can do is manage our costs, and that's what we will concentrate on doing, and I think we are doing just an excellent job.

On the fresh meat - on the fresh pork side of the business, our vertical integration strategy, if you sort of read the - read the theory, as hogs go down, the fresh meat numbers ought to pop up, and we still continue to believe that that - that holds true on a longer-term basis. Hogs have really dropped off this quarter, and earlier than we expected. The seasonal impact that comes starting in September and October we still expect, and generally that's when hogs go down and the cutouts are really quite strong. Summertime, the first quarter of our fiscal year, is always our weakest quarter from a fresh meat standpoint, and that continues to be true now.

In addition to that, you're all very much aware of the glut of protein on the market and more than just the pork sector. And that has held quite a lid - that, combined with the - some of the challenges in the export market, have put a lid on the fresh meat cuts and we have seen dramatic year to year reductions in the average market for things like loins, which were off 26 cents a pound year to year and hams which are at least in my 22 years, I'm seeing hams - Mr. Luter might can relate to a different people, but I can't remember when I've ever seen hams at the levels that they're at. In spite of the fact it appears that bellies - some people were say bellies are at an elevated levels, bellies are still trading at 20 cents a pound below where they were last year. So if you take the pure value of the cuts, they're all - they're all really - that $15 a hundred weight, as that translates into a per-head basis, the value of the cuts coming off the hogs are down that same - almost that exact same number, and once again, that's an area of something we cannot control. We can only control our selling prices relative to the market that everyone else is out there selling at, and the export markets have certainly had an impact on that.

Now, with that being said, that has provided a tremendous opportunity for us in the processed meats end of the business and we have capitalized on that in a couple of very significant ways. We indicated in our press release that several of our processed meats categories were up more than double-digit volumes and I can assure you that while we don't report margins on processed meats, given the issues of transfers and allocations between the fresh pork and the processed meats, we don't report those segments separately, our processed meats margins at the contribution margin line are up dramatically.

They reflect both the benefit - the benefit of these lower cuts and our ability to not pass all of that through in terms of pricing, and to extend our margins there, as well as to grow distribution for our processed meats where our volumes in our bacon category are up more than - more than 10%, our overall processed meats business is up 10%, that including acquisitions.

But our base processed meats is up - is up 8%, which is very sizable, given the large base of processed meats the company already has. So we took the opportunity when these raw materials were cheap to gain market share, and I would not say market share losses, I would say market share at significant profits. The creation of our new Smithfield deli group, this calendar year, we are already seeing nothing short of dramatic volume growths in our deli business, which I am extremely pleased with the job that Rick Goodman is doing for us. He's new to our organization. He certainly came in with very high marks, and he has certainly shown to us that he has the talent to grow this business very dramatically. I'm expecting significant growth going forward.

Volumes are up there far more than the - far more than our total in processed meats. We're approaching nearly a 20% volume increase there, and margins are up approaching 50% there. So I cannot say enough nice things about the business we're doing that we can - we can control.

Other parts of the business, our international business, we've shown in the segment table the significant growth in our international business. Our Canadian operations are having a - are having a banner year. Our French operations are not having as strong a year but they had a banner year last year. Markets were very much in their favor, and they indicated that this would be a down year. It was hard to - it would be hard to replace that. But our international business is very strong.

That being said, there are some negatives. Our Polish operations, our losses are down but they're still losses. We've put - we've put some management - made some management changes that I've discussed earlier in place. Those management changes are benefitting the company. We are not profitable at this point. I think the losses are continuing to decline. I have hopes that they will be profitable very shortly. And I'm not going to go out and make the prediction that we're going to be profitable in the second quarter. I think we will be but I'm not going to make that statement. But I do feel like we've got the right management team in place. We're adding livestock production. We've mentioned that before. In Poland, which is going to help in increasing the sourcing of livestock to those plants which will help to spread the overhead over a bigger volume. It will also increase the consistency of the raw material going into that plant, allowing Poland to be an exporter of quality products out of Poland, as well as to access the hypermarkets in the domestic operations there. So I think we are - we continue to be - we've mentioned before that we remain committed to Poland. I think that we are - we are close to beginning to realize a return on our investment that unfortunately has been delayed in coming to us. We're just as optimistic as we've ever been. Unfortunately, getting to those - getting to those profits has been a little more lengthy process than we thought it would be.

So from a business standpoint, I think our management team is doing the things we can do, given the markets that we've got in front of us. We do have a number of corporate synergy initiatives that we've put in place. We've put in a transportation initiative, some six or eight months ago, that is just now beginning to bear fruit. We are signing up the contracts. We are - we are running freight under our consolidated program now. Those - those dollars are not significant to the bottom line at this point, but they're going to be more significant as we go forward. It takes time to get these things in place. We hired a new vice president of our transportation and logistics. It's taken him several months to coordinate something of this magnitude. I think he's done it quite quickly, and we're already starting, just now, to see the benefits of that going to the company's bottom line.

The other things that we have done, we have put together several manufacturing synergistic programs where we manufacture for each other in a combined and coordinated effort in our ham-curing operations and our smoked operations and our bacon operations to take advantage of the manufacturing capabilities across companies, rather than looking just within the towers of the individual operating companies.

One of the things we've mentioned in earlier calls that we would be striving to do. We are doing that. That is benefitting the company. It will result in lower costs to us, which will make us even more competitive on the processed meats end of the business. That's the area we're concentrating on. I'm very optimistic that over the next several quarters, that those numbers are going to be more and more significant to our processed meats margins and our overall gross profit line.

The - in terms of some of the things we've still got to - we're struggling with, I mentioned Poland. We've purchased Quick to Fix last summer. That was - we bought that company out of bankruptcy. To this point, we have not been successful in generating a profit in that business. It's a relatively modest-sized business. It is tied - its business is largely tied to school contract business which takes effect here starting in August, and I am very optimistic that Quick to Fix will be profitable in our second fiscal quarter, so I think we have turned the corner, although in this quarter's results and the priors, we have not. We have not generated any profit there.

We entered into a joint venture this past fiscal year with [Penex] Foods. [Penex] Foods is a case-ready operation outside Philadelphia. We believe that is a true - a strong avenue into the northeast market. It ties in with our northeast marketing campaign. [Penex] has been handicapped by an antiquated manufacturing facility. We have - we have acquired a new manufacturing - it's not a new facility but it's new to us. It's a very good facility. We are at this point involved with a significant capital project which will put us in the case-ready business in a very efficient manner close to the northeast market. It's going to be the end of the second fiscal quarter or maybe just - just into our third fiscal quarter before [Penex] is going to be in that plant and fully operational and benefitting from the efficiencies that need and achieved from a - I guess a new and modern arrangement as opposed to antiquated process they use today.

For some of you who may not know, [Penex] is a publicly traded company and just released some earnings even this week, indicating that their sales are up. They have very strong sales. They have not achieved profitability, and that is impacting with our 50% ownership - that is impacting us at a 50% level.

Quickly, our Mexican operations are not profitable at this point, although we have - we just finished a major cut floor addition that just was completed in the last 10 days. It's going to improve the efficiency of Mexico, and we believe that that's going - that, combined with the other changes, the other - the other growth issues we're doing there, in terms of sales concentration and livestock production, we believe that Mexico, while it's not a big number to our bottom line and it may not - and it may not turn around in the next quarter or the following quarters, but Mexico is - we're taking the right steps on the right long-term basis for Mexico, and I'm really not worried about that end of the business.

I think that will - I think that will cover an operational review. I'm sure many of you have questions, in terms of where we are relative to the industry and our competitors, and at this point, I would like to open the call up to questions.

Rita, we're ready to take questions please.

Thank you. Ladies and gentlemen, if you'd like to ask a question, please press the number 1 on your touch-tone phone. If using a speakerphone, please pick up your handset before pressing the number. You may remove your line from queue at any time by pressing the pound key.

Our first question is from the line of John McMillan with Prudential. Please go ahead.

Good morning, everybody.

Good morning.

Good morning, John. Hopefully, Joe, you didn't slaughter that dog I heard barking in the background.

No. I'm sorry you heard it.

No. I kind of - kind of enjoyed it, actually. It is summer, you know.

I'm just trying - I guess we're all trying to gauge whether the - you know, the worst is over or it gets even worse from now and that's kind of a broad question that you probably don't even know the answer to, but a lot has to do with kind of hedges and I know you're reluctant to kind of give hedges. I think it was published somewhere that you had some substantial corn hedges in place that would protect you a little bit from the rise in corn prices, but can you just talk about, you know, whether - as you kind of see it now, we've seen the worst, or does it get even worse?

Well, John, let me say this: You know, we have the hog cycle, it's been around for a hundred years. You know, we had cheap hogs in '94, we had cheap hogs in '98. Guess what, it's four years later and there's cheap hogs in 2002, and what happens when you go through these cycles, the hogs move into the [inaudible] for the industry and there's a cutback. Back in '98, there was only about a 5% cutback, and within - you know, within a year, right at a year, we had $55 hogs and were making record profits. That's going to happen again for one simple reason is that a very big segment of the hog-growing industry does not have deep pockets and they react immediately.

In addition to that, when corn goes up, as it has just in the last recent weeks, although it's come back down quite - some in the last several days, the farmers in the Midwest sell their corn and do not feed it into livestock as readily as when corn is very, very cheap. It's what we call the - you know, the hog/corn ratio, and the cycle.

So despite the fact that the profitability in the hog-raising group has been disappointing here this quarter, it was very strong last year, very strong the year before, and it will - and it will be strong again in the future for one simple reason is that there are not extremely deep pockets in the industry and people react to losses pretty quickly and production cutbacks, and the fact that we have the - in my opinion, you know, we have the cheapest, largest hog-growing operation in the world. And so, you know, we - we take these opportunities to buy additional assets and, quite frankly, long-term, a $20 hog market is not going to hurt us because it gives us opportunities to go forward and at the end of the cycle, we emerge stronger. That happened in '94 and it happened in '98 and it will happen, you know, in 2002.

But you're basically kind of riding the market now without much hedges? Would that be fair?

Well, John, I said last time that we weren't going to get in and tell the world about our hedge position.

Yeah, I know.

You know, it -

Well, somebody seemed to know it, because it's - you know, I read it on the tape that someone seemed to think you had large positions in corn.

Well, a lot of people - a lot of people say things they don't know what they're talking about. There's a lot of misinformation out there, John. Do we have some coverage? The answer is yes. But we don't have full coverage simply because it wasn't the - the market was too thin to get full coverage this year.

And just a rough number for - for net debt. I know you don't give out the balance sheet but the debt at the end of the quarter?

John, this is Dan.

Take that question, Dan.

Yeah. The debt position at the end of the quarter is going to be about a billion-and-a-half. It's being to be up about 300 million from the same time last year. Most of that due to acquisitions and some of our treasury repurchases.

And Joe, take this right way because it's not really meant as a - I mean you've got a great record but someone asked me when they went through the annual report and the proxy that, you know, you're under this increased scrutiny of corporate governance and certainly your company's has been a wonderful performer but someone mentioned to me that, you know, the average age of your directors is 66. Can they - can they do a good idea of keeping their eye on things.

And I really didn't know what to say, except to say, you know, Reagan was president at 70, so would you comment in any way in terms of the diversity of your board and corporate governance and basically how Smithfield is kind of minding the store in this age of increased scrutiny?

Yeah. Well, I can tell you that I've been with the company for the second time since 1975, and my instructions to everyone within the organization and what I have conveyed to the board consistently for the last 25 years, that we keep a conservative set of books, and if it's a gray area, we will err on the side of caution. And we - we have never had a major - in fact, we not even have had a minor adjusting entry - at the end of the year by our auditors because we - you know, we do - we have always taken corporate governance very seriously, long before the - what's happened in the last six months. But having said what's happened in the last six months, at the end of the day, after all of it is put together, you're probably talking one, maybe two percent of corporate America, and -

Yeah.

- and I totally believe that 98% of corporate America is just as honest as the day is long. In fact, they're the most honest people I deal with are the people that are in the business world.

But we understand the politics involved, but - but I can tell you that we know - we take it very, very seriously and we try not to make any overly optimistic projections. That's why I've always refused to give, you know, estimates of quarter to quarter. I've always said that this is not a quarter-to-quarter company, and I don't want to get out on a limb and predict a good quarter and two weeks later something happens that I have no control upon. The government makes a mistake on a report in regard to hog numbers or feed deals. But I'm just -

Don't worry about it. Okay. I appreciate your -

Hold on one second, John.

Don't slaughter it.

Hey, John, let me talk for just a second.

Sure.

I mean, obviously I've been the company's chief financial officer and I've been with the company for 20 years in a financial capacity, and I would tell you that I stand -

Yeah, I'm back, John.

I stand pretty firmly on - and would back very wholeheartedly Mr. Luter's comments in terms of the approach this company has taken. We've seen - I've always had - Mr. Luter it's always been his same attitude that we take losses first and report gains when they show up in the bank account. We don't have - we don't have fuzzy accounting in any - and there's never been any discussion of any fuzzy accounting. We've never had disagreements with our external auditors. And then finally, I wanted to come forward and address that issue in terms of our board. I mean, I think we have an extremely involved board. Our audit committee - I'm sitting here with Dan Stevens, looking at him as I say this. Our audit committee is very involved in this company. Dan spent more than - or nearly an hour yesterday on the phone with the audit committee going through the press release before the release was issued yesterday, and they asked some very, very good hard questions. So I don't think you have a board that's asleep at - sort of asleep at the switch at all. Smithfield has - we've done a number of years back, we've gone to, you know, an awful lot more of our directors are independent according to any rules. Even those that - even those that may not meet the SEC or the NYSE rules, certainly -

Larry, we've got to go to other -

Yeah. Thank you for answering that question. I appreciate it.

Our next question is from the line of Christine McCracken with Midwest Research.

Good morning.

Good morning, Christine.

Hi, Christine.

Wondering if you could tell us, last time there was kind of this - this part of the cycle we saw Smithfield get pretty active in terms of acquisitions. At this point, do you anticipate getting any larger? Do you see any consolidation in the industry? Could you comment on that?

Yes. I'll answer that question.

Yes, we are looking at a fairly major acquisition at this time. We expect it to take place. We're seeing - but we're also seeing some pretty dramatic increases in sow slaughter, which indicates that the herds are being reduced. Tyson announced several days that they were exiting the hog business in the Arkansas/Missouri area. I think that's 30,000 sows. So we are - we are - you know, we expect to take advantages, as we always do, when we have a down cycle.

But let me just say that we are going through a down cycle now, but, you know, it - you know, here again, it's going to be temporary and I'm totally convinced long-term our company is just getting stronger and stronger and stronger, and hog prices are just something that we can't do anything about but we take advantage of it and there's no question in my mind when we come out of this cycle, we will hit new highs in profitability. I'll put myself on a limb to that extent.

In terms of this major acquisition, this I would assume is not tied to the Farmland bankruptcy and -

That's correct.

Okay. And then if you could just talk then about your goals on debt levels. You know, obviously you guys have done quite a bit of - or quite a few acquisitions over the past few years. Are you at all concerned about your exposure there?

You mean antitrust?

No. I'm sorry. In terms of debt.

Debt levels, Joe. You want me to take this one.

The debt load? No, we have - Well, here again, Dan can take it, but, you know, we wouldn't have any problem at all on raising additional equity if we needed to.

All right.

Christine, if you want, the total debt to total cap number at the end of the quarter is going to come to about 54%, which is about where we were at year-end, so we're fairly comfortable with where we are in terms of the capital structure. And as you know, we've done a number - a number of the major deals that we've done have been for stock. We've managed around that 50/50 debt/equity and we expect that we would stay there in that range.

All right. Thanks.

And our next question is from Leonard Teitelbaum with Merrill Lynch.

Good morning.

Good morning, Leonard.

Larry or - just a housekeeping question. You have zero minority interests now, is that correct?

Dan?

No. We have -

Because I didn't see it on the release and I wondered what happened to them.

Well, Lenny, it's become so immaterial that we -

Did you just blend it up.

Yeah. We put it into cost of goods sold.

Fine. Now, as I look at this, it seems to me - and I think you've given one pretty revealing statistic - that the cutout values have dropped about the same as the hog prices, so you can't increase your spread.

Now, if that's a -

That was in the summertime, Leonard.

Yeah. Well, that's what I was going to ask. Now, it's hard to get -

Now, in the fall, we fully expect to increase the spread.

Exactly.

Okay. Now, if that is, let's say, one of the key reasons that we were down in this quarter, would the - since we - at least when I look out, I'm presuming that we're starting to enter the fall now. Does that mean you're anticipating a better spread in Q2 or is it going to take until March before we see it in the numbers, Joe?

No, I think you'll see it - I mean, in fact, as we speak, the cutout profits today are dramatically better than they were just 10 days ago, Leonard. And as we move in - it's almost as if you move into Labor Day and from Labor Day to Christmas, every year that I've been in the business, the margins in fresh pork get dramatically better than the summertime.

Before we became vertically integrated back maybe when you weren't following us as close, when we were much smaller, we - we felt very happy if we had a break-even first quarter, but we didn't have the hog production profits and the beef profits to help us. But we felt very fortunate just to break even the first quarter and we went on to have record years when we had losses in the first quarter, and we do expect the margins, the fresh meat margins, to be very strong this fall, as they have been every fall since I've been -

So would it be fair to say, Joe, that given what we've got right now - and look, we had a billion-dollar rain three days ago and we've got another one coming in from commodities, but is it - would it be safe to say this loss you've sustained in the first quarter could be cut in half in the second quarter, just because the cutouts values improved?

Well, the losses on the hog production group - well, first of all, we haven't had losses as a -

Well, I'm talking about the reported losses now, as we blend it in, because I'm concerned with the - with the spread between the cutout value and the price of the hogs. So what I was saying, if we're getting a better cutout value, could we have the reported loss in the current quarter that - versus the quarter we just reported? Or isn't it getting that - that much better?

I expect - I expect that the second quarter will be dramatically better than the first quarter despite the fact that I expect hogs to be a little bit cheaper in the second quarter than - not - not expect a little bit. I think they'll be cheaper, no question, in the second quarter than the first quarter. But I'm not going to - you're not going to lead me, Leonard, into predicting quarter to quarter.

I was hoping John would and he dropped the ball.

Huh?

I was hoping McMillan would and he dropped the ball.

Well -

I got to try it. But it just seems to me that if you're looking at industry conditions as you describe it, and saying, look, the past hasn't changed in 20 years, I'm just trying to get some kind of a feel for saying, look, if things are going to get better, then they're going to get better, and if not, we have to sit on the sidelines here for another two or three quarters. Then I - then I think that's the perspective that you certainly could give us.

Well, I think the hog production group's profitability will go down more in the second quarter, but I expect the fresh meat results to be dramatically better in the second quarter. How they balance out, to that degree, precisely, I do not know. I mean, and that's - that's the nature of the business. I have to keep repeating that, Leonard but that's the -

See, we give you credit for that, Joe.

You know, and I'm not going to be - I mean half of these people, I mean, you know I'm - I'm not going to get myself in a - you know, in a look at what's happened in the last six months, thank God that I have held to that - held to that conviction. I'm just not going to do it, Leonard.

I will tell you this: That a lot of our competitors are not making money. You know what's happening at Farmland, and, you know, when this process is over with, we're going to emerge stronger as we've done for the last 20 years, and I'm - long-term, I could not be more optimistic. We might have a disappointing quarter next quarter, perhaps, but that's not what drives this company and this is not what drives our decisions.

All right. Let me just try one more question here. If we could get into the Lean Generation, the marketing programs that are so in evidence out here, how close are we to breaking even in that business, given the high level of advertising, and how much of a loss did that entire precooked and Lean Generation program cost us in the quarter?

Dan, do you remember what - exactly what the - the advertising cost us in the quarter?

Well, in the quarter, Joe, it was about $4 million for the Lean Generation program and -

Yeah. What about the operating - are we breaking even?

Oh, yeah. No, no, we're making money on Lean Generation.

On Lean Generation overall, Lenny, we're making money.

How about the precooked products.

Precooked products has been fine Lenny. I mean there's really pretty good margins in that. We're not having to spend monstrous dollars. I know you've probably - or maybe you've seen something about people making some very large slotting allowances to buy their position.

Right.

We're not doing that, Lenny, and that's not Smithfield's - that's not the tack we've ever taken and we're not going to be a victim of that.

We believe that we have a superior product and when it settles down, you know, we expect to see some pretty dramatic growth there. We just moved into a brand-new plant on this precooked product that's located in Peoria, Illinois, and, you know, we've taste-tested this product and we're just very optimistic at what we're going to be able to do.

You've seen the - excuse me for interrupting, Joe. You've seen the - you know, the First Call and consensus estimates that are out there for the full year. Do you have any comment on them?

I haven't seen them, to be honest with you, Leonard.

Larry has.

I don't pay much attention to them, to be honest.

I know Jerry has too. Do you have any comment on the consensus estimates for the -

It's $1.39, isn't it?

I believe so.

It's come down.

I believe it's lower -

Leonard, we're not going to project profitability.

Okay. I'll let -

I mean -

I'll let Nelson have a shot at it. Thank you very much.

And our next question is from the line of David Nelson with Credit Suisse First Boston.

Good morning.

Good morning, David.

Good morning, David.

I noticed you repurchased close to a million shares last quarter and, you know, your comment today about a major acquisition, I know you've miss torecally taken advantage of a lower share price. Could we expect share repurchase to continue at this level.

Should we expect what, David?

The pace of share repurchase, which was close to a million shares last quarter.

I think - you know, I think that will depend upon what the stock price does. As you know, David, as I've said many times, if the stock gets real cheap, we'll forget all acquisitions and buy our stock back. And once our stock gets at a price that we think is a lot more attractive than the company that we would be looking at to acquire, you know, we - we stop and repurchase our shares. We take opportunities, earn, depending upon what the circumstances are. But -

So I - we should maybe imply that that was the case in the last quarter?

That's right. When we didn't make a major acquisition last quarter.

Yeah. Okay. Any -

But we do - I mean, we do - you know, we've gone up to 57%, 58% debt to equity, and we don't plan to do that, but in in - and in extreme circumstances, we may do it, but I don't think we will, but it would depend upon if it was a very, very attractive acquisition that we thought would immediately accretive to earnings and we didn't see a risk factor, you know, we may do that. But we don't expect to.

Okay. You said this major acquisition you're considering is not Farmland. Is there an update on the Farmland situation?

No. It's one that - Dick - Dick Poulson?

Yes, Joe.

Are you there? You want to address the - I think we might - we may be a little bit misleading about this acquisition that we're working on, the small one, the relatively small one.

David, I would not use the term "major." It's definitely part of the core business. We're in a due diligence period. It looks favorable from what we've seen so far.

Okay. Is there an update on the Farmland situation?

Farmland still - I think they're having a board of directors meeting that started on the 20th and probably went through yesterday. They have not come forward with any plan of reorganization in addition to the statutory 120 days where the debtor has the absolute right to present a plan of reorganization. The court gave Farmland an additional 60 days. Our analysis of it, from what we've seen and we haven't seen much, is that it would be very, very difficult for Farmland to reorganization without selling off some major assets because unless they sell off major assets, there would seem to be very little available for the unsecured creditors, the bond holders, and even some of the trade payables.

Okay. As I look at your beef results here, you're showing a profit of almost 22 million on, I guess - slaughter was maybe 520,000 head. If that's anywhere near in the ballpark, you're making about $42 per head. Is that kind of math correct?

Yeah, David, that's - you got the math right.

That's impressive.

I don't know if everybody does their math like that, David. That includes our rendering operations, but, yeah, we're making that kind of money.

Okay. You do -

Keep in mind, David, last year we were at a loss, and here again, this is the history of Smithfield Foods is buying underperforming companies and turning them around.

Yep. And you talked about signs of liquidation, and also in terms of impacting overall meat supplies as well as hog supplies has been herd growth. Any sense that the hot weather this summer might temper hog and pork production, come first of the year?

You mean hot weather reduce -

Reducing breeding.

Reducing breeding? I can't specifically say it will, but the answer is generally yes, when you have a very hot summer, the productivity does fall off a bit, David. There's no question about that.

We've had - we've had ideal conditions up until about three months ago, and most of the hog-growing operations I think in the country have done better in productivity efficiency than they did, you know, the previous year.

Uh-huh.

But I think the major - the major reduction is going to come from reductions of herds and there might be a slight reduction because of the hot weather.

Okay. On international, profitability was up a lot, and given your comments related to Poland, Mexico and France, I've got to presume that the big improvement was from Schneider's in Canada.

And the reduction of losses in Poland.

Okay. Any comment about Schneider's?

No. I mean, it's the number-one brand name in Canada, and, you know, and it's doing well. It's - you know, it's still a relatively small part of that business, but, you know, it's certainly a - a quality company.

Okay. Great. Thank you.

Uh-huh.

And the next question is from the line of - one moment, please. Please hold one moment.

One moment for our next question.

Our next question is from the line of [Raisa] [Rahab] with Lehman Brothers. Please go ahead.

Good morning.

Good morning.

Just one housekeeping item. Can you give us total outstandings on your bank lines and also revolver availability, and then I have another question.

[Raisa], this is Dan Stevenson. We've got about $340 million available in short-term liquidity through our - through a combination of our domestic and our international and short-term credit facilities.

Okay. And the comments that were made regarding improvement in pork processing margins in the second quarter because of better cutout values, is that here in - is that purely seasonality or is that also the spread actually improving more than just seasonality?

No. No, that's not right. We did not say we had better fresh pork. We said we had better processed meats. That's hams, bacon, and sausage.

Exactly. Right.

But we - on fresh cuts, we did not have better margins.

That's right, Joe. That's right.

But do you actually expect the margins to improve for the processed business purely because of seasonality or because spreads are improving over and beyond seasonality?

No. On the processed meats side, we read the riot act to all of our presidents about six, seven months ago and said, "Look, we know that we're going into cheap hog prices and the profits from the hog production segment are not going to be as strong, and we're looking to you to help cut the slack and we expect dramatically better processed meat margins going forward."

Now, in the last - in the last seven, eight years since we built [Bladen] County, we had a dramatic increased in fresh meats and the processed meat volume increases did not come as fast as we knew they would not, and we spent a lot of time increasing these volumes and margins had - had suffered in the last eight or nine, 10 years from where they were 10, 12 years ago, but that's part of grabbing market share.

Now, we have the market share. We demanded that we increase our margins on processed meats from our operating heads, and they responded to those strong urgings from corporate.

Right. Okay. And then as far as supply/demand balance is concerned, obviously second quarter doesn't look good, but - and your comments suggest that calendar '02 will be tough, but does that mean that you're cautiously optimistic that '03, calendar '03, will be better or you just don't know yet?

Well, I mean I will say fiscal year '03, we expect to be dramatically better because we think that the - we think by that time, the profitability in the hog-raising group will dramatically improve, and our processed meat business volumes will be up, and we expect to merge a - you know, a stronger company. Now, we did this in - you know, after '94, we did it after '98, and we'll do it after 2002.

You know, what we're going through right now, I emphasize, is temporary and quite frankly it probably helps us in the long term because it gives us opportunities because when things get tough, as they are now, we have opportunities that - that are - that - you know, that rise to the surface because we do feel that, you know, a big part of this industry is still unprofitable, and it gives us opportunities.

Right. On the acquisition front, your acquisitions in the last year have been mostly in the processed side. Does that mean that you're still strategically focused on improving your - or strengthening your processed pork and beef side, or are you just going to be, I guess, opportunistic?

Well, hopefully we're going to be both. We're going to continue to emphasize processed meats. We've done it through the advertising program, the strong one that we have in place this year for the first time. You know, and we expect that to be - in beef and pork, you know, and poultry, too for matter.

The [Raisa], the one point I'd like to at least make you aware of is that we've had very strong - in my opinion, very strong growth in a number of our processed meats categories and process the meats overall for the industry overall are relatively flat, so we've been able to expand our distribution and get market share, and at the same time expand our margins pretty dramatically, so -

But we're going to continue to push processed meats, and that -

He's correct there.

But we're not going to - but hog production, although it is - hasn't - you know, we were still profitable this past quarter in hog production, and what we paid for those assets I wish we'd bought more of them back in '98.

Great. Thank you.

And - uh-huh.

And our next question is from the line of Scott Nussbaum with J.L. Kaplan.

Hi. I had a quick question regarding the case-ready. Haven't heard much about that this quarter. I was curious to know if there's been any major contract wins with customers, how the business for the Wal-Mart is going, et cetera.

Larry, you want to take it? I will take it or you, either one.

Well, I guess - Joe, I'm not - you can certainly have your comments. Scott, one of the things I don't like to do and I'm not going to get to is I'm not sure who is on this telephone call but I do not like to discuss our relationship with individual customers.

Certainly we could pass on some information that others could use to our disadvantage, and so I would - I guess I'll stay with the higher level numbers and tell you that our processed meats numbers are strong but I don't want to go to individual customers. I'll be glad to discuss Lean Generation growth or case-ready volumes or such, but in terms of individual customer relationships, I'm not going to discuss that. Joe?

Thank you. Can you -

And there is a question from the line of John McMillan with Prudential.

Can you give us those case-ready volume numbers, and Lean Generation numbers.

Our Lean Generation business continues to be - continues to grow. I think we're up 4% year over year. Not giant number, but continuing on the base we've got, those are still very sizable numbers. Our case-ready business, quite honestly, is off - is off a little bit. We're off four or five percent on our case-ready. And I count in that our association with [Penex] because part of our case-ready operations now involve their operations. Case-ready, quite frankly, is an area we thought was going to grow very, very dramatically. We've got modest assets invested in that. Really kind of minor assets. We have not gone out and built joint facilities to accommodate case-ready.

Well, we have in [Penex]

Well, I was getting ready to go there, I was getting ready to go there.

We are in the process of building a very size - well, a sizable facility with [Penex] , the 50% joint venture, and they've got an awful lot of business sort of waiting in the wings when they can get this facility up and running. So case-ready, I think, is going to continue to be an area of growth. It has certainly not is seen the growth that we thought it was going to see, and some of that is a reaction to Wal-Mart having done what they've done and some people not wanting to be Wal-Mart look-alikes. And there is some - some rumors we hear in the industry that Wal-Mart's rethinking some of this process, to be honest with you.

So case-ready is going to evolve and we're going to go with the customers, to be honest with you.

The hog price average in the quarter was what? Your hog price average was what? I mean I know it was $38 last quarter. What's a rough average for this quarter. Speaker speaker I think it was right around 35.

I thought it was 38.50 or something but ... where am I? 38.50 is the number I'm looking at.

So it's roughly what it was in the previous quarter, not the year-ago quarter but the previous quarter?

And Joe, your statements about improving dramatically, I know you're not predicting earnings, but that $38 number doesn't really improve this quarter, at least so far.

No. I told you hog prices, John, are going to be less in the second quarter than they were in the first quarter. I mean, that's been true probably -

Sure.

- every second quarter for the last hundred years. We all know that. And we do expect the profitability to be less in the second quarter.

Oh, okay.

In regard to raising hogs. But we do expect the fresh meat results of our - of John Morrell, Gwaltney and Smithfield to be dramatically better than they were the first quarter as they are ever year.

Oh, okay. I was a little unclear how you were answering Lenny's question but now I understand.

Okay.

Thanks a lot.

Okay. Sure.

Our next question is from the line of Scott [inaudible] with [inaudible]

Yeah. Good morning. With the acquisition of [Penex] , you guys have clearly targeted the northeast as the location probably most successful for case-ready. I was just wondering what - you know, what went into that thinking and, you know, what your goals were, you know, for the next, you know, 12 months or so.

Well, I think very simply, I think if case-ready - it makes sense throughout the entire country. How quickly the industry embraces it is still up - up in the air. But we believe that it makes more sense in the northeast than anyplace in the United States because of high labor costs, high land costs, high square footage costs in the stores, and we do expect it to be embraced there by the industry. Much more than in other areas of the country.

Okay. And then you also said that you haven't seen the growth that you expected with it, and also that, you know, Wal-Mart is possibly considering going away from it. What do you place the odds, sort of, on case-ready -

Well, I don't think we said that they were going to go away from it. I think Larry said - and you can speak for yourself, Larry, but, you know, they're rethinking some things. We don't - we don't know what Wal-Mart's going to do. I don't expect it to go away myself. I'd be shocked if it does. But I think what's happened is - and here again, I don't like to talk about competitors, but I think that a lot of the retail market is concerned that the - you know, that the John J. Wilson brand is being identified as a Wal-Mart brand and a lot of the retail industry just doesn't want to go there.

We'll take - we've got time for one last question, please.

And our last question is from Kenneth woolard, a private investor.

Good morning.

Good morning.

Most of the questions I had in mind have certainly been answered but I would like to just compliment you on the annual report. I thought it was most precise and very informative and one of the best I've ever seen in any corporation.

Well, I appreciate that. We - you know, we have tried over the years, as I said earlier, to be very informative to our shareholders and to - not to surprise them in any way, and we have - you know, we have taken corporate governance very, very seriously from day one, and I - it's nice to hear a compliment once in a while.

And one other thing I'd like to say is I think maybe Tyson's got its got its belly full now with the IBP acquisition, huh.

I don't know.

I mean I heard they were shutting down plants and so forth.

No. The only thing I know they have done is they have cut back on their hog production but they didn't buy that from IBP. They've had that for a long time. But they have shut down some plants. I think the thorn Apple valley plants, and some plants, but quite frankly, I think they made the right decision.

Yes, sir.

As an outsider looking in.

It was a wonderful meeting today. I can say that.

Well, thank you.

Thank you. We'd like to thank everyone for joining us today and have a good day.

Okay. Larry?

Gentlemen, that does conclude your teleconference for today. Thank you for your participation. You may now disconnect.