Smithfield Foods Inc (SFD) 2003 Q2 法說會逐字稿

And Ladies and Gentlemen, thank you for standing by. Welcome to the Smithfield Foods Second Quarter Earnings Conference Call. At this time, all participant lines are in a listen-only mode. Later there will be a question-and-answer session, and instructions will be given at that time. If you do need assistance during the call today, please press the “0” followed by the “star”. As a reminder, today’s call is being recorded and will be available for replay, starting today Thursday, November 21 at 12:30 -- I am sorry 12:30 PM, that’s 12:30 PM Eastern Time and it will be available through next Thursday, Thanksgiving, November the 28 at midnight Eastern Time. You will be able to access the AT&T Executive playback service at 1800-475-6701, and then be prompted to enter the access code of 661643. That number here once again, 1800-475-6701 with the access code of 661643. This information will be again given at the end of the conference. At this time then I'd like to turn the conference over to Jerry Hostetter. Please go ahead sir.

Good morning. Welcome to our conference call to discuss Smithfield Foods fiscal year 2003 Second 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 the Chief Operating Officer; and Joseph W. Luter the III, Chairman and Chief Executive Officer. This is Jerry Hostetter, Head of Investor Relations. Larry Pope will begin our presentation with a review of operations. Larry.

Good morning folks. I'd like to [inaudible] report to you that the second quarter of fiscal 2003, we are reporting $4.1m or 4 cents per diluted share, compared with $60.5m or 56 cents per diluted share for the quarter. For the 26 weeks, the company is reporting $15.9m or 14 cents per share, and a $117.4m or $1.10 per share on a -- from the prior year. Our sales for the quarter were up significantly, reporting $2b versus $1.7b. The sales increases are the result of the inclusion of the beef division, Packerland that we acquired in the prior year -- not in our prior year numbers. And the other impact in terms of sales were certainly the impact of lower hog prices as those translated into lower fresh meat prices. Sales reflect the offset to that, to a fair degree, by processed meat numbers, where we had volume increases that [top] offset some of the price decreases on the fresh meat side.

The results for the quarter do include a couple of back and forth charges, unusual charges; those are outlined in the release. Certainly we would be glad to answer any questions on you and in the interest of full disclosure, and full visibility of our numbers, we are disclosing several smaller charges, both gains and losses. And they amounted to about 1 cent a share that positively impacted this quarter. You'll -- with the results for this quarter -- although [partly] released for this quarter, we have outlined all of the segment information, both at the sales level and operating profit level. This is the second quarter that we have done that. We hope this segment information helps to answer some of your questions in terms of visibility of the operation, and how we are doing in the various segments of the business. We're trying to give you more information, so that you can better understand where the ups and downs in the businesses are occurring. With that being said, from the business standpoint, we are certainly disappointed with the results in the hog production group. Those [inaudible] hog prices, which are up significantly from the prior year, $15 a hundredweight. And that’s translating into better than $40 a head. Obviously, that drove the numbers and those declines are impossible to cover in terms of the meat processing group. [Cheap those] -- as well as cheap fresh meat prices as a result of the increase in supply of all the protein [kept a feeling] on the fresh meat pricing and our ability to achieve as much as we would have liked on the fresh meat side. But, hopefully, those situations -- I'll talk about that later, are changing.

On the positive side, we are extremely pleased with the meat processing group and a number of different areas. As you may remember, when the company built a Bladen County plant some 10 years ago, we had an awful lot of fresh meat and raw material that we had to do something with as a part of slaughter operations. The fresh meat is relatively easy to move by simply pricing the product -- pricing the raw material and pricing the product and you can move fresh meat. And the other raw material product that goes into processed meat, it takes a longer time to build those -- to build that base of business. The company has had that as a focus, as you all know, for 10 years. And as a result of that focus, in order to get the market share and to get those raw materials used, we've had to compromise on some of the pricing that we would have liked to have done in the past. And the Company is now refocused, as a result of having [filled] space up dramatically, when large measure [have a use for] for those raw materials in our processing operations, either by organic growth or by acquisition. And so we're in a position to focus on improving our margins and improving our branding position. And I think we are doing that just exceptionally well in areas of the business that are very, very strong for us. Our bacon business is very strong from a volume standpoint and a margin standpoint. Overall bacon and the pre-cooked category of bacon that is -- for the Company is -- our Patrick Cudahy operation that has been in that business for a number of years. The opportunities there seem to be just stellar, and that business alone is up more than 68% in terms of volume. Our boneless ham business is very strong. Our deli program that we announced, the Smithfield Deli Group earlier this calendar year under the leadership of Rick Goodman is doing exceptionally well. We're seeing volumes over 20% growth and margins over 35%. Our beef business, as you can see from the segment table, is very strong beyond just the dynamics of the beef industry in general. Rich Vesta has done an excellent job of improving the operating efficiencies of the Moyer operation, we purchased a little over a year ago -- I guess closer to a year-and-a-half, and that operation is performing very, very favorably. And our numbers -- we are very, very satisfied with the beef end of the business in terms of where we're at. And I give that management team a strong accolades. Another bright spot on the meat processing group is our international operations. Our Canadian operations are performing just absolutely stellar. Earnings are up more than 5 times the prior year numbers, which again were profitable. But that was -- we are extremely pleased with the integration of the Mitchell's operation into the Schneider's operation, and their ability to capitalize on their significant market share in the Canadian market from a processed meat standpoint. You may remember that we sold off our fresh meat operations at the Schneider level, not their subsidiary Mitchell, but the Schneider level may be two years ago now. And we've recovered those, and focused on just the processed meat and that has worked very, very well for this company. Beyond that, our French operations, are actually having a down year, but they came off an absolutely stellar year last year and John Hunting (ph) indicated it would be difficult to match those earnings this year. And so we are still continuing to be very pleased. And finally the bright spot, the really bright spot on international is our Polish operations, which we're pleased to say that we're reporting our first quarter of profitable operations, since we bought the company nearly three-and-half years ago. And the net of this is that our Canadian operations, our French operations and our Polish operations -- I am now very satisfied that we have very, very solid management teams, who were taking care of those businesses out of the U.S. borders, and I think we are on the right track in every country.

So the numbers do reflect our several, what I would call, opportunities. We have a number of several start-up operations -- our Mexican operations are in the middle of an expansion. We are putting farms into our Polish operation to improve the raw material going to those plants. We have a joint venture with Pennexx Foods in Pennsylvania for case-ready into the New York market. And our Quick-to-Fix operations that we bought out of bankruptcy, just a little over a year ago, all of those are adversely effecting our earnings at this point. They all represent opportunities that we remain solidly committed to, in fact, extremely optimistic about. Today it's very simple, you don't have economies of scale or don't have the right mix that we are changing very, very rapidly, and I think we are going to see -- I am very optimistic that the future for each and everyone of those is very, very bright.

One bright spot, in terms of this current year, is the acquisition of the Stefano Foods early in this fiscal year. We cannot be more pleased; it is already producing very, very substantial returns relative to its business size. And that one -- that acquisition is already bearing fruit for us, and the management team Enrico Braunie (ph.) and Joe are excellent. So, what I would tell you from our side - our base business is extremely strong. Our process -- use of our raw materials and our processing operations is progressing at an excellent pace. And, in fact, I would tell you that we've got opportunities now in many of the categories where we have been net sellers. We are on the verge of being net buyers of those raw materials that we’ve been in situation of having excess bellies and hams and trimmings in such. We -- in terms of those categories, we are very shortly going to be net buyers. Our Hog operations are fine; our livability and efficiency numbers are up. Our operating results, in fact, are better than the impact of the price decline and the increase in grain-cost. So, from an operation -- operating standpoint, we are actually better-off in the Hog production operations, which positioned us well for the future. The bottom line on all of these from a business standpoint is I am extremely pleased with the management team we have in each and every one of our operation. I think our business people are focused, I think our management team is experienced, and I think we are ready to benefit when this market turns. And I don't need to tell you that the futures market seem to indicate that next year, starting with the February futures that it appears these Hog prices are going to turn around. They look good for the remainder -- through the summer. So, this Hog market, it is turning and that's really the only issue that's affecting the business. We have a number of food service opportunities in front of us that we already have what I'll call a lot, sort of, in the bank. It seems we didn't get the manufacturing facilities in place and give some of the contracts, [in] effect -- some of those things and like the Foodbuy LLC, that we announced, we have not yet shipped any product against that contract. So, I think the future is extremely bright. And I think we are well positioned to take advantage of this thing, when these markets turn next calendar year. With that point, I'll take questions.

Thanks. And Ladies and Gentlemen, if you do wish to ask a question, please press the "1" on your touchtone phone. You'll here a tone indicating, you've been placed in queue, and you may remove yourself from queue by pressing the "pound" key. If you did press the "1" prior to this announcement, you may need to do so at this time. Also, if you are using a speakerphone, you may need to pick up your handset before pressing the "1". And our first question comes from Christine McCracken of Midwest Research. Please go ahead.

Good morning.

Good morning Christine.

Sounds like things are getting a little better over there in a few months. I'm wondering if you could just give us a little bit more color on what you've done to improve efficiencies over the near-term that -- in hogs production? Where you are relative to say, kind of, industry norms and how that might be -- helping you as hog prices improve?

One of the things Christine for a minute and Mr. Luter might want to have his comments. We had this consolidation of our production operations. I guess that’s really a year or closing in on two years ago now, maybe a year-and-half ago. And what one of things that we needed to do from that was to drop cost out those production operations, and we continue to get the benefit of that from our logistics in the feed hauling, and blending, and grain operations, the feed mill operations. As well, I have mentioned this before, we are working much, much closer between the meat processing operations and the hog production operations to match the models of scheduling and to minimize the freight cost going to the various plants for the various operations. And then finally, the operations themselves have worked very closely, in terms of their housing and improving their livability numbers and then reducing the mortality levels of all three of the -- I guess there's the weaning process; there's the nursery process, then the finishing operations. And so, these guys have got -- we're using the talent of all our organization together by putting the right people together, and we are seeing the benefits for that, both on the cost side and the pounds of meat coming out of our production operations. And it takes time for a big organization of [700,000,000] that many people for the management team to gel together, as well as, to integrate forward into the processing side. And Jerry Godwin, who leads the pork production group, has done a great job of bringing that management team together, putting people in specialized operations. As an example, we've got one of the gentlemen, who exclusively focuses on nothing but the international side of our razing operations, he has no domestic responsibility [inaudible] Greg Smith, who is been with the organization, the Carroll's organization, before we bought that number of years. Greg is exceptionally good. Our genetics program, we are re-looking at our whole genetics program to improve that. So what we are doing is bring -- I would tell you that, I think we were already very, very good if not the best in the industry. But beyond that, we are taking that now to another level.

And going. --

Excuse, I will just This is Joe Luter. I'll just add - the meat products is we are -- we've been working for our couple of years with the Meishan Pig from China that has -- historically had [signicantly] more pigs per per sow per year. And we are experimenting across in that with the [MPD] pig - for how to get the best of both words. But the main thing is that for years and years and years, the big concentration was the growth in the hog business. And we are quite frankly at a point now where there are enough hogs in the country. We do not plan to add additional sows in this country, except through an acquisition. Because we simply -- I think, we have sufficient number of pigs. So, we are devoting our full resources into improving our productivity and driving cost down. And we are not being burdened by having to go out and buy land and seek permits that [their] buildings and, but the main thing is that we bought all the three organizations, Murphy's, Brown's, and Carroll’s together, and they all had feed mills that weren't necessarily the closest feed mills, I mean for instance, Murphy might have a feed mill that was closer to some of Brown farms than Brown's own feed mills, because all three hog operations in North Carolina were spread over a fairly large area. So, that has all been put in to place and the management team has continued to consolidate, and we are, I guess, confident that we've got the lowest cost in the system. As you know, we just bought Vall's which was a 20,000 [inaudible] operation and it has been around for a quite while and the Vall's people have been hog growing not just in this country, but also in Europe, and when we look at their cost and against versus our cost and the bottom line is just a reconfirmation that our costs are certainly better than anything that we have seen from other people, and certainly substantially favorable to the real small operations that still exist in this country.

You had all worried with the productivity improvement that you have seen, that there might have been a change in the industry that might force actually a much smaller breeding herd?

Well, I think, our breeding herd is smaller and there is no question the pigs per sow per year have gotten better as everyone has focused and on the improvements we have got. I personally expect the breeding herd to be smaller next year than this year, the productivity has pretty well leveled off, though, I think there will still be some improvements, but it's not going to be, you know, it won't be 10, 12-15%. It might be 1%, 1.5-2%. But the thing that you have to remember in hog [inaudible], and I have stated this many times, is that we always had [large] swings in pricing. I think these swings will become less severe as the business is moving into more business-like [hands, if you will], but it is -- but you always have a -- if you have prices going in one direction, we always have a major correction for one reason, and that is, the people that are in the business for the most part do not have unlimited resources. So, when the prices move into losses, it doesn’t take very long for people to reduce the size of their herds to get back to profitability. That is never been true on the meat packing side because quiet frankly, we got a lot of competitors out there that got more money than ability in some cases, and they will sit there and operate at losses or breakevens for extended periods of time. And that has never been true in the hog production side simply because the giant financial resources are just not there to be able to sustain losses for any extended period of times.

Thanks, and just one final question Dan, maybe, you can answer, what is CAPEX in the quarter?

In the quarter, Christine, it was about $50m.

Thanks.

Thank you and we do have a question from Leonard Teitelbaum with Merrill Lynch. Please go ahead.

Good morning. Could you tell me what your average daily slaughter was for this quarter? [audio gap]

Hello.

Yes, can you hear me?

No. We heard a very-very loud sound and ….

Okay. Could you tell me, what your average daily slaughter rate was for this quarter? And what do you anticipate it to be for next quarter?

Do you want to calculate that Dan, if you can?

Maybe while Dan’s doing that. Are you expecting the current quarter [volume] to resemble kind of the quarter that just ended here, Larry? And, you are looking at one or two bad quarters before this thing turns around?

I guess, [I understand], what we call about 75.

That’s a little bit more than -- just over 70,000 per day.

70,000 per day, and what are you anticipating for this quarter?

[Oh], it will probably be, I guess I am surprised by that number, and I think that -- all I can say is this Lenny we are not running Saturdays. We did run some Saturdays this past quarter, but we are not really running Saturdays at this point except to cover holiday periods. The cutouts are something not strong enough. Even given this favorable market, it doesn't make lot of sense to kill hogs on some of these Saturdays unless these cutouts get better. So I would say the numbers are going to be the same to down a little bit.

Okay. Are you expecting one or two bad quarters before this cycle turns Larry?

Well.

I guess the current quarter is going to look a lot like the one just ended doesn’t it or it [looks a bit stronger].

You are talking about the November, December, January [period]. From our hog production side, I mean, I think we've hit the bottom there through the end of August and September. Hog prices, it looks like they are going to be stronger this quarter than they were last quarter now and [in February] you see the February futures. So, I don't need to tell you that the February futures are back in the black. Now the other side is on the meat processing side, November and December is when our strong process meat holiday sales are generally where they are -- I mean not generally they are there and this is -- no exception. We 're going to have a very good holiday season here, so -- I am expecting process meat margins to be better than they were the second quarter. I am expecting hog prices to be quite frankly a little better and the fresh meat environment is better. And those 3 things being said, you know as well as I know, Lenny, the markets can change overnight, but today if you look it looks like hog prices are going to be a little higher. I am sure we're going to sell more processed meat and today the fresh meat environment is better.

I know Joe doesn't like to talk numbers, but maybe you could give us some kind of color looking what you see for the full year here, given what you just said?

Well I guess the only comment I will make to that and I agree with Joe in terms of projecting and giving forecast, [the only thing I’ll say on that], but you look what's beyond the February futures going forward, the February going out to the summer, the futures look better and better and better as the year -- calendar year progresses. So, I would say from a hog production standpoint, unless the futures are not right hog production is going to only get better, so from that side I feel comfortable. Our international business is strong and our base processed meats business is strong, so the issue today becomes how fast is these proteins move through and some of these inventories get cleared and some of these production starts -- some of this reduced production starts to impact the market, and how good the fresh meat business is. I think it's that simple Lenny.

Alright, one final question, how far are out are you hedged in your [corn] [inaudible]?

Joe, you would -- I think he is the one to make a comment.

I am sorry.

No -- I am -- I was cut off about 4 minutes. I don't know whether -- anyway I was cut off for 4 minutes, but I am back on, so…

Okay, how far are we hedged, Larry?

Lenny, I guess -- one of things we don't like to do is give our hedge positions. We said that before, I will tell you that what we are doing is controlling our raising cost going forward.

Okay, you are not reacting to high prices against improving. We have -- actually high prices [inaudible] against improving this product?

We are -- I think we announced in the last conference call that we have some [corn] hedged through the middle of October of this calendar year and we -- when those grain prices moved up this Summer, we did not -- lock-in those grain prices, so the fact of matter -- I guess the answer to the question is no, we're not being impacted by the run up in grain this summer, that’s the question you're asking.

Yes sir, I'm and thanks very much.

Okay.

Thanks and we do have a question from Michael Olmen's (ph.) line with GMO (ph.), please go ahead.

Thanks. Could you please comment on your cash and debt position at the end of the quarter?

I will defer to Dan.

The cash position is going to be about $50m, but that’s really just [unapplied] cash but that’s a small investment cash marketable security. The debt position will be just over [1.06b] and that’s up a little bit from yearend.

And the share repurchases in the quarter if any?

None in the quarter. We're down about $60m for the year, but none in the second quarter.

Okay and could you just comment assuming that grain prices or feed stock prices remain where they are, what price you need -- hog prices to get to in order to achieve a breakeven result on hog processing, you know, hog production, sorry?

Right now it would right in the $37 range. If grain prices is going up and down 4-5 cents, you know, a change of 4-5 cents [every] week up and down, but we expect our hog cost next year to be somewhere between 36 and 38 cents per hundredweight.

Okay. Thanks very much.

Thank you and we do have a question in from Ann Gurkin Davenport & Co. Please go ahead.

Good morning.

Good morning.

I understand that on farmland is [shopping itself maybe] again or trying to get prices, evaluation for its business, can you comment on that, would you all be interested again there, any comments there?

I'll take that question, Larry.

Okay.

Yes, we’re interested in farmland as we would be on any forecast that might become available, and as you know they are in chapter 11 this is all I think, but they are loosing very substantial sums of money currently as my understanding and I think the question is are they going to be able to come out of chapter 7 [off the] chapter 11 or go with the chapter 7 liquidation. And all I will tell you is that we'll follow on it very closely.

Can you comment if you are interested in one part of the business more than another?

We would be interested in the beef and the pork business more.

Okay. Great. Thanks.

Thank you.

Thank you. And we do have a question in from Eric Katzman with Deutsche Banc. Please go ahead.

Hi. Good morning everybody.

Good morning Eric.

Two questions. I guess the first one has to do with the kind of outlook for the futures market. I'm wondering if you could, just obviously your knowledge base is a lot better than everybody else on this side of phone. Isn't it a normal seasonal pattern for futures to be moving up as we go towards this spring? So to what extent is they are still like, you know, while there is again a seasonal pattern, aren't we kind of looking at still lower prices than normal. I suppose the $36-38 hundredweight that Joe quoted is recognition of that because normalized would above 40.

Normalized what, production costs.

Live hog prices.

No, 36-38 is the production cost, not price.

Oh! I see. Okay.

I apologize, if I didn't make myself clear over that.

Okay. And how about just a comment on the futures market and what they normally seasonally do? If there is a normal pattern?

[inaudible] if I had any strong expertise in predicting where the futures market was, I would to resign my position today and play the futures market. I would like to say that there is anyone in the country that, you know, quite frankly can do that with any degree of certainty over the long-term and it is highly volatile, as I am sure most of you know, and it is totally impossible to predict. And, I will just give you one example. In the last quarter the live hog prices and the futures always correspond with live hog prices when they have real near term. What we had? We had $19-20 hogs in August and had $33-34 hogs in September and had $30 hogs in October. Well, I have been in the business for a long time and I don’t ever remember having substantially cheaper hogs in August than you do in October. And of course, you know, that totally distorts what the August futures were compared to say the October and the December futures. So, I mean the futures market is not something that you can predict. Having said that, I think, you know, the futures market in hogs is showing some substantial increases in the next 6-7 months. For one reason, they are [inaudible] slaughter is up substantially, the hog numbers will be down substantially. As a result the other proteins beef we're expecting less suppliers, we're expecting [oh], I am not on an authority in the poultry market. I have to expect certainly no growth and maybe some decline in poultry supplies. The export markets look reasonably good and that all [bears] for substantially higher prices, but you got to keep remember one thing as I mentioned before, without exception, in the last 100 years every time that you've had low prices below cost, you always have a major correction in a corrected sample that appeared [inaudible]. We had low hog prices in 2002, we had them back in 1998, we had them in 1994, and we had them in 1990. And [general speakering] is what we call the Hog Cycle and that is about every 4th year, we'll have unsatisfactory fresh meat results. But as I have said over and over again for many, many years now that this is a company in an industry that you have to look at in longer periods than -- certainly than a quarter, even a year, but if you look at it in 4-year segments, we have done extremely well, and I see no reason for that trend not to continue. Hog prices or hog profitability, if you look at it in 4-year segments, it's very, very positive for Smithfield Foods, and -- and what we've always done is when we get into the situations such as we've been in for the last 4, 5, 6 months with unsatisfactory results, we take that up everyday to expand in an area that is not doing well. That is when we bought Murphy and Carroll’s right after the 1990 [inaudible] and we just bought Vall's on this past week, even though that operation is currently loosing money. So we are kind of a company, you know, that we buy assets when they are not in favor because we are 100% certain that they will turn around for the same reasons that I gave a few minutes ago.

Okay Joe, I would like -- let me follow-up with one question. You said that you're more going to be focused now on, at least on the pork side, in cost because the acquisition on a [inaudible] maybe slowing a bit. So, if you look out over the 4 years, whatever kind of cycle you want to look at, we normalize it to the best we can. And what should investors think about in terms of growth now, if there is going to be a little less acquisition driven activity and more focused on margins and case ready and branded?

Well, I said that we didn't -- I did not say -- I said that we would not be expanding our hog operations by construction. Okay, that's what I said. I didn't say that we would not be expanding through acquisitions, and it's certain that we are looking at acquisitions domestically and [par] in international to carry the business forward, and I see no reason at all that [inaudible] we can double the size of this company in the next four years through acquisitions domestically and overseas. There are some -- there are lots of opportunities in other parts of the world right now. People have mentioned farmland, that would be a very sizeable acquisition, you know, if that should take place. But, and there are tremendous opportunities in the [further] process line. We will become -- if you look at all of our acquisitions in the last 18 months, it's all been on a processed meat side, whether it's Stefanos or Quick-to-Fix or Quick-N-Easy or Stadler Country Hams. We see tremendous opportunities to get into the [further] process, more convenient ready-to-eat, fully cooked area and our growth will come there, but it will not come from putting in additional farms in this country, having said that we are putting in additional farms in Poland [inaudible] we want to create the same model in Poland that’s worked so well in the United States. That alone in Eastern Europe today is a tremendous opportunity for a company such as Smithfield and tremendous growth to take place in Eastern Europe for this company and as Larry has mentioned, we have had the first favorable quarter. We already know what the results are in Poland for the first month of the third quarter, and it is by far the best month, and I say by far, I mean, its by-far, by-far-far better than any single month we’ve ever had there. And as we had these hogs to fill up these under utilized plants that we’ve bought for well below on replacement costs some three years ago. We expect a substantial turnaround in Europe and I’ next one or two years, but in the next 5-6-7 years, I could see as much profitability in Europe as we have in this country.

Okay. Thank you.

Thanks. And we do have a question then from John McMillan with Prudential Securities. Please go ahead.

Good morning everybody.

Good morning, John.

What was the unusual charge?

Do you want to take that Dan, will take that.

Well, John we had a couple of things in there. As Larry mentioned, its kind of, in the interest of full disclosure, but the biggest item on the positive side was a insurance settlement.

Yeah.

4.7. We had two small items. A litigation settlement. It was about $1.5m and then some adjustment in our Mexican operations for just over a $1m. Those related to some U.S. to Mexican GAAP adjustments.

Okay. What was case-ready volume in the quarter?

Case-ready volume, quiet honestly, John, is down. Like you, you probably know that, we have reported that in a prior quarter. That business is not growing at least as rapidly as we thought it would be. I will tell you that we have lost some business. I don't want to get into the customer situation. The other side of that is I think there are opportunities that are presenting themselves on the case-ready side. Particularly, through our Pennexx joint venture operation that have been, not -- nearly where they should be simply because they have been sort of capacity constrained and we are just now finishing up a new plant for them. [And so the] case-ready is going to come back. It's down. I will tell you it's off 30%, but I think we are -- we see some opportunities -- significant opportunities in front of us there.

Well. Yeah, keep in mind we have brought very large plant outside the Philadelphia area, and we are putting in equipment and beefing up that operation as we speak, and that will add a tremendous amount of capacity for us and we continue to be, you know, we continue to see that as an opportunity despite it being down, but most of us down just in one area, and we expect to recapture a good part of that. But I don’t want to start get into naming specific customers, but we are still optimistic, but its not growing as fast as we thought. I know some of our other competitors reporting some increases but it is [centered around] one customer and try -- but we do expect that business to get substantially bigger and with that commitment, with this new plant. And here again, we have had significant losses in that plant in this past quarter as we gear up any brand new plant. So, we're still committed. But that business is not what I call processed meat, it's just -- we are just selling fresh meat in a different form, John, and having said that, that business can come very, very quickly. It's much easier to have substantial increases in it then, say, having substantial increases in bacon or sausage or ham items. It can come pretty fast.

Joe, I know you have a very decentralized company with some very good management, but maybe I can get Larry just for a second to talk about how many individual selling units you have serving big retailers? And what you are doing to kind of centralize the system? I know that is a very big question, but I know there are some specific things being done. Can you talk about it?

Well, let me see if I can answer it. I mean we've got, take it almost [inaudible] my head there -- from our beef operations to our Smithfield to John Morrell, and Gwaltney, and Patrick Cudahy four major -- five major really US plus our Canadian as such. Well, let me be clear. We would like the function of these independent operating companies. I think that works for this company. We are coordinating activities where it makes sense that our customers want that. The most prominent example, the Deli group that we formed this year, the operating companies felt that was the best way to service the Deli operation. The corporate office proposed that from a corporate standpoint, the operating sales organization want to go to market in that format. We as well are looking at relationships of customer that match the way the customer want us to do business with them. And so, I know there a lot of people out there who are -- talking about one phase to the customer and in creating these account teams, we are open minded in terms of organizing the way our customers want us to do business with them and in some cases we do the business at a corporate level, sort of the proposal to the customer, but then actually the day-to-day business is still done at the operating company and that's working. I can tell you John, that's working exceptionally, well for us and I could not be more pleased with the structure where we had -- I am not criticizing anybody else for the structure, as that may work. But it works -- this one works for us very, very well.

Thanks. And just in terms of -- my last question, we are looking at the genetics program, you know, obviously you have been a little bit of a disadvantaged with Deli prices up and -- is this genetic program, not getting into technical issues, [does] did this one have bigger bellies, is that a genetic issue that you are trying to add to your hog?

Let me address that. Yes, we got very, very excited many years ago about the [MPD] because we were [inaudible] test that the [MPD] animals say against the [PRC] [inaudible] animal, and we saw a very big difference -- advantage I should say John. In fact everything else that something that seems to be too good to be true, it turned out -- it turned out to be the case, and we are still very, very happy with the [MPD] animal and it has improved our bottom line. I don't think [inaudible] to the bottom, but the bottom line hasn't been improved as much as we thought. And the main reason of that was that 10 years ago bellies was so cheap, you couldn't sell on. People were beginning to -- the prices were going to be at a level where we would cut them up, put the material into sausage rather than selling it as sliced bacon. And then one event happened which dramatically changed the business. I am sure you know about it, and that was the Jack in the Box incident. And after that the McDonalds, the Wendy’s, the Burger Kings, the of Jack in the Boxes of the world had to take the hamburgers to a 168 degrees internal temperature, which in effect took an off lot of the taste out of the sandwiches. And as a result today, there is bacon on more sandwiches on a very, very significant way and bacon is used in foods service in a more significant way we have today. Bellies are trading at substantially higher prices than hams even though bellies continued to be you know twice as fat as hams and that's taken place and that was un -- you know just one of the un-predictabilities of this business and that has worked against us. We can take steps through feeding and through different crossings to bring the belly size back up, and we’re working with some different [inaudible] as you know, we are 100% on [AI] on Atificial Insemination there. So, it’s something that you can correct in a relatively short period of time.

And the cost?

Come again.

The cost of [something] that genetic?

We -- I don’t want to get into all. This is a little bit of trade secrets what to do in regard to genetics. All I will tell you is that we are -- we have developed since the acquisition of Murphy and Carroll very, very close working relationships to come up with the i.e. the perfect pig for us. That is always changing…

Yes.

…because the market condition is changing, but we've got the two sides working together for Smithfield Foods rather than having a Hog Production Group strictly concerned about the profitability on their side and the Meat Packing Group just concerned about the profitability on their side. We had the two talking together for the common good or what is best for the total company, not one segment of the business over the other segment. And so this is something we're constantly addressing and genetics is like everything else. You won't improve in one area and generally speaking, you give up something in another. Again you have to get your heads together and come up with what we think is the closest perfect pig that you possibly can and that changes as market conditions change. But here again because we have the ability to do that on such a massive scale that no one else in the world does. It does give us a long-term advantage over other people who're buying their hogs helter-skelter from thousands of different producers.

Thanks for explaining that all to me.

Thank you and we do have a question now from David Nelson with First Boston. Please go ahead.

Good morning.

Good morning. David.

Could you comment on progress with your pre-cooked items please?

Again, if I would tell you -- the pre-cooked business is only to tell you David it continues to grow for us and in fact we have had some capacity increases at our [RMH] facility that we bought I guess has been just over a year now. But we see the opportunities on and we got that big market under John Morrell and Smithfield Packing Company and Gwaltney. For those continue to grow and grow and grow, as well as, our Quik-to-Fix operation in [inaudible] Texas, is really a pre-cooked operation there as well. And another operation under John Morrell, an acquisition over a couple of years ago, [inaudible] a meat and a cooking operation. All of those, every one of those are growing. You realize they are still -- well Quik-to-Fix is not a small business but the other one's are really relatively small volumes compared to the giant process meats business. So there's still a long way to go, but we are getting good acceptance. -- The margins are very strong in that product and our product is very, very good. So is it a huge category today; no, is it a growing category; absolutely and we don't see anything is going to stop it from continuing to grow.

How big could it be in the next three, four, five years?

I don't know that number.

The American consumer is going to decide that, it's still -- it's growing -- substantially, but you know, we don't know whether this will be a Snapple situation or not. I'm trying to be honest with you David.

Okay.

If you know what I mean.

Yeah.

It is growing. We are happy. We do have expertise in the area. We are pushing that area, but as Larry has said, its still relatively small in the overall scheme of things and that's going to have any dramatic impact upon that earnings for the next one or two years, but we do fully expected to positively -- to have a positive impact into what degree we are uncertain but -- what we get really excited about as Larry has mentioned earlier, is substantial increase in bacon business, processed ham business, and have sausage business to use a bad raw material and then they will continue to take it further than a process meat [lines] whether it is microwave or baking and they are ready to eat items. We are not a marketing company like [Hawmill], but as I've said many times, we are becoming more like [Hawmill]. Will we ever be like [Hawmill]] totally, I don’t know, it won't happen in the next two or three years, but we are continuing to spend more advertising dollars than we've ever spent in the company. We are continuing to push processed, branded meat harder than we've ever. So, we are making more efforts to become more like an Oscar Meyer or [surely], a [Hawmill] we ever have and not concentrate on just getting bigger in the fresh meat business. If that had been the case we would have been on active pursuer of the current [inaudible] assets which quite frankly we, don't just let pass and just didn't have very much [interest] because all it was -- just an additional fresh meat and that just did not have a lot of appeal to us David.

Okay. On the turn around in Poland, that Animex could you comment on how sustainable you think that might be and then looking ahead into '04 over the expansion of the EU?

Yes. I think it varies. I mean, I'm fully expecting as I think as we've mentioned several times in the past, David, we felt we bought those assets and [inaudible] we had taken. I mean they were -- they might have very large for the most part the clients were probably, I mean [inaudible] us, you know, is certainly comparable to American standards if not better, they would just over built and under utilize, and you just didn’t have the quality -- quantity or the quality of hogs to run through them to make it work and we're working very aggressively with the Polish agriculture community to correct that problem and because of the location of Poland, the size of the farms and the land mass in Poland compared to Western Europe, the labor rates, the feed availability, we're very, very excited. We think the opportunities are unlimited, we just discussed with the management team to make it happen. Things don’t happen by themselves, it takes people to make them happen of course and we think we went through several people and we just came to the conclusion that you just can’t take a 50 year old ex-communist and turn him into an entrepreneur. I mean it’s just, and so we’ve, you know, we've gone in other directions, but in another 10 years we expect the management team to be predominantly Polish if not a 100%; and we are very enthusiastic.

One of that big success stories of this country is the profitability on the [inaudible] ham. That's probably the highest priced hams being sold in this country today. It has a tremendous power, you know, it's not -- the number one seller ham, but it’s I would say it’s probably the most profitable -- I wouldn't be surprised if it’s the most profitable ham in the country today. But I am very enthusiastic, I mean as I said earlier, you know, one quarter or even in the first month of the third quarter, I mean that doesn't -- I'm sure we will have disappoint quarters over there as we had disappointing quarters in this country, but I see tremendous opportunities there because quite frankly the hog industry in Europe is located in the wrong parts of Europe and it shouldn't be in Holland, it shouldn't be in Denmark, it should be in Poland and the Ukraine because, you know, that's were the lowest cost production can take place. And Poland has a historical day with the [inaudible] Europe before the communist came in and screwed it up. And when I see the reason involved, they can regain that position in the next 10 years when Poland becomes part of the EU. And I talked to many people in Europe that in the last 6 months, and I have asked them all, where do you see -- what do you see the industry is doing in Europe. And without exception; everyone only says, "moving east." That means moving east in the Poland and the Ukraine. The hog numbers are going down substantially in Holland because they got -- you know because of the water tables, higher labor rates, and pollution, as a result of having a very higher water tables on the land. Look at the average sized farms in West Germany and France. This is no way they can be competitive with that massive government subsidies and they still seemed to be committed to those subsidies, but the conventional wisdom is that if they don't change their way, its going to bankrupt almost certainly -- the very prohibitive. And having said that, we don’t seem to have learned a damn thing. They just passed this [inaudible] deal in this country, which is just totally, you know, we are seeing [inaudible]. We don't learn very much, but I am still confident that, you know, that three, four, five years from today, government would be less in the subsidy business in agriculture than it is today despite the recent agriculture bill.

All right.

But that’s just my opinion David. And they may not be right, but we do see tremendous opportunities there. If world trade becomes bigger, we see tremendous opportunities in Brazil. We got a very, very small operation. We got a joint venture with a -- a very successful Belgium company [ORTEL]. They were the Weight Watchers people and we have a joint venture with them in China and which is very slow and its not worthy to mention it today, because it's, you know, just assist us, you know, but see it right now. I think -- there is still a lot of opportunities we haven't -- peaked and as I said earlier, I don't see any reason, you know, why we can't dramatically improve. I mean dramatically expand this business because of the international opportunities and obviously, you know, I do not believe that Farmland will be an independent company a year from today. And that's an opportunity. Whether we are successful, we have a history of not overpaying for assets. I don’t know whether we will be successful or not in that area. Well, we're going to start to look at it hard.

Great. Thank you very much.

This is Larry. Folks, I'm going to have to excuse myself and I want to catch an airplane here, so…

We have got time for one last question please.

Thanks and we have a question from Andy Wolf (ph.) with EB&T Capital Markets. Please go ahead.

Good morning. Just wanted to follow up on Farmland. Could you just remind us roughly what their sales mix is in terms of fresh and further processed?

We have not been given those numbers out there. Their sales in pork is about $1.7b. The total beef and pork sales are around, I think little short of about [billion] and the other part of the business in fertilizer, in the oil and all of that. We had zero interest and I will tell you that.

Their major brands are in things that you have like bacon and other further processed [inaudible].

They have one brand basically that I know about and it's called Farmland and it's a fairly-- pretty significant brand.

Is that mainly bacon or are they doing hot dogs and you know…?

No, they've a very substantial hot dogs business. They have a very substantial bacon business. They have a pretty good ham business. They are profitable in beef. They are under performing, but they do have a very good brand name. I will say this that, that company should be worth more to us than any other company in this country because the percentages between the two companies I have analyzed, you know, assuming their potential that will be, we have some competitors would perhaps be interested in those assets, but for a variety of reasons those assets should be worth more to us than anybody that I see up there because of percentages. We have people in place that have got a vast knowledge in processed meats, for instance, and I just think that we can bring more to the table to the table to turn around Farmland and other people can't for a variety of reasons, and then some of the major players that are out there, I think, [inaudible] particularly on the beef side would be prohibited from being a player. We have looked at it from antitrust standpoint, and we are certain that there are -- will be some opposition particularly from the political side in the Midwest, [inaudible]. But having said that, we have hired some very knowledgeable people in the antitrust area, and we are convinced that there should not be a problem if the pork protein is treated the same way as beef and chicken has been treated. So, if they want to discriminate against pork to the advantage of beef and chicken, we might have a problem, but that problem can be resolved by, you know, disposing of an asset here or there. But we don't expect that to be a problem. But, we do see it as a potential opportunity, and we are -- I don't want to say [a whole lot other] than we are on top of it. We are not -- we know everything [this happen] in, but I do not expect it to survive as a standalone company. I just don't expect that to happen, because I just think that we're convinced that the unsecured creditors -- there is no way that they are not going to take a substantial loss. We do believe the secured creditors are all secure, but the unsecured credit is -- a lot of those unsecured creditors are farmers who have switched moneys from 401Ks and where ever into these bonds, and its very, very sad but that is the situation.

Andy, the best information we have available to us on the breakdown of [inaudible] process, but the pork business is about 50-50. We don't know if that is fact, but it's based on the information that we have.

Thank you. And I would imagine the beef is mainly packing?

Yes, that is going to be sold, mainly packing.

And just could you comment on the process, I mean, the bankruptcy court is in control here. Are they sort of setting up for an auction or is that too far along?

You have got a key date of November 26, ah, Dick Poulson?

Yeah, Andy but that is in flux, being …

Let me call upon Dick, because Dick is the point person on Farmland. I will let him comment.

Andy, the situation is influx. There is a hearing that is set on November 26, and I think, things perhaps will be a little more clear after that. There is no process in place at this time.

Thank you. And just getting back to the core business, just to finalize on Farmland, clearly you think you are going to extract a letter, and I know you are quite at the point of due diligence, but this would be -- kind of a big time accretive acquisition. Can we get you on the record on that?

Andy, I don't want to go there. I don't want to create any duty on our part to update or anything like that. We have had access to absolutely nothing except the public filings of the bankruptcy proceeding today.

Okay. I understand that. Back to the core business and sort of the profit -- [power] and the core business, I think, just for a while been talking about [$2] and you bought -- you bought beef which adds,its easy to do the math on that. But you have of mixture [often] further process that, I think, you are quite proud of and have talked a lot, but really haven’t resisted given us margins and given us a lot of reasons for that. So, can you talk to at least, you know, certain order or magnitude if you are really going -- how much profit margins doubling and further processed? Are they up -- you know what -- give us something so that we can try to understand where the earnings power of the Company is heading? And just as you take the mix, as [you] alluded to earlier to be more than [inaudible] the Company?

Well. We are demanding that these companies to increase their margins on processed meats. We had, as Larry mentioned earlier, to gain market share in processed meats, it's a much harder thing to accomplish than, I mean -- excuse me -- increase sales on processed meats, it's much harder to accomplish than in fresh meat. Fresh meat, you just have to be [sell] a pound cheaper and you can get the business. On the processed meat side, that is not the case. And -- but we've dramatically increased the volumes in processed meats, as we opened the Bladen County, but we've had for a lack of a better word we have to sort of buy our way in and our margins have suffered the last 8-9 years, and we fully expected that. We have now gotten to the point that we've got the volumes that we want. We're the 'number one.' We sell more branded sliced bacon today than anyone in the country including Oscar Meyer and that’s not one brand, it's quite a few of their brands, but still branded higher margin branded bacon, we are the 'number one' in the country. And we do do some private label too. And of the current debate who is bigger in total slice bacon sales [inaudible] are how we appear at this time. We think it’s us, but it’s so close either way. But in any event, we are dramatically improving these margins. We are committed to that. We knew we're going to have a very difficult time on the Hog Production side, which carried us for the last couple of years; and it will carry us next year, and the following year. It did not carry us this year, but we -- but I think, if you look at increasing profitability in meat processing group and you compare that against everyone else that has reported earnings in this industry, I think you will see we have done a better job than anyone else has by a pretty substantial amount. [Inaudible] a pretty substantial amount. And we are going to continue to do that. We are, you know, through advertising and [inaudible] on a talk show yesterday in New York on National Program, we had one of the chefs on and she mentioned bacon and said in her opinion the best bacon that she has used in her recipes and so on was Smithfield bacon, and we are having lots of [inaudible] have taken place which, you know, which is helping us to complete our long-term goal of being a major, major player in the process meat business and we are not a 100% there but we are much better along today than] we were last year and we expect these margins to increase more. I mean if you look at companies like [Hall Mail] and the profitability that they have got on processed meats against us. It's clear to anyone that looks at it that we are still way behind the company like [Hall Mail]. If you look at the [processed] meat side, we are way ahead.

How much is [inaudible]?

There are lots of room for improvement, whether we [ever] become the 'number one' brand in the country, I am not sure; but if we could be 'number one' in the country, we have 5-6 brands and we're pretty happy with that. As I have mentioned before, with the food safety issue -- with zero tolerance mentality and food safety area, it's a little bit frightening just having one brand in the what can happen if you had a food safety issue come up, you know, a brand could be wiped out overnight, perhaps; and if you have multiple brands, there is certain safety component to that, of course. But, I think that you will continue to see the pricing margins on the meat processing group get better and better and better, and then when the Hog, when the margins on the Hog growing side get back to historical levels, we should attain profit plateaus this company has never seen before. And this is -- I am repeating myself -- this is our goal and this is what we've been talking about for a long time and if you look at our earnings over the last twenty years, you know, we are up and down, but if you look at it in four year segments its straight up. There are no downs on the four-year segment and we see no reason why that should not continue and perhaps even accelerate. But we are going to have disappointing months, we are going to have disappointing quarters and we are going to have a disappointing year from time to time. That's the nature of the industry that we are in, but in the long-term we have returned to shareholders something in the top [5 percentile] in Corporate America may be even higher than that and that's what drives us and not the, you know, short-term results.

Again, longer term on -- just on the margins for further processed as -- is it going to be driven up more on sales mix or more on, you know, you are sort of catching up on where you think [inaudible] pricing should be?

Discipline and sales mix. I mean I will honest with you, 2 or 3 years ago, on bacon, we were probably one of the cheapest people on the street but we were grabbing market share because we were tired of selling Green bellies to outside processors and then make the margins. And -- but now we are at point Louis [inaudible] for instance, as [Smithfield] told me last weeks Joe, with the new bacon lines we have come in online in the business we have wind up. We will be a net buyer of Green bellies for -- to make bacon not net sellers and we are not going to have to go out and search out new business. This is all steady business. And, we think the tough pricing laws that we have been through, by grabbing this market-share; we will never be over but I think will be diminished. That could change, but we are committed on margins over growth. I think it is the simplest way to put it; and do we think that we have peaked in regard to margins? Obviously, not; we are not even close to some of the margins that people like us Oscar Meyer are getting today. So, we have a tremendous opportunity ahead of us as a challenge, but, you know, but that’s the direction that the company is moving into and...

Okay. And just last thing. I just want to circle back to Farmland and I think Dick mentioned a hearing on the November 26th. Could you just tell us what is sort of published or the public record nature of that hearing?

Andy It is a hearing of the -- a default occurs under the [debt] financing unless the company has filed a plan of reorganization on that date. I don't know whether that is being amended by the banks, whether the banks have given a waver or not. We will not know until the hearing.

Thank you.

Joe, Would you like to make some closing remarks?

No. I think I have, in fact, I probably just made them in the last five minutes, Jerry. You know we're obviously not pleased. I think the bottom line is we're not pleased with the profitability of the quarter, but we're pleased with the area of the business that we managed and that we can control. And we've done very, very well there. Hog prices have been very disappointing. I mean, that has obviously hurt us in a very big way, but that is not unexpected that -- it happened in '94, it happened in '98, it happened in '02, and it might happen in '06. But if you add '02, '03, '04, and '05 together and '06 together, the total results are going to look very, very good, but, you know, every four years or so, you know, it's going to be a down quarter. So, as I said unless you are interested in -- I don’t think four years is long term, but we are a sort of, you know, we have four year investment and, you know, that's what we've been preaching this for two decades now and we're totally confident that we will be reaching profit levels in the next several years that we have never obtained in the past when hogs get back to profitable levels, which they always have done, you know, since the industry was founded 200 years ago. I mean it always happens. Farmers will not raise hogs at a loss, for any long length of time, that will not happen. And once the herds are reduced just 4 or 5%. What happened in '98 on the herds of hog's got as cheap as $10. It was so severe, there was dramatic cut backs and then over -- I guess after 18 months later hogs got a backup of $65 and we got a $36 cost on the $65 animal. You are making $75-80 a head, and when you raise 1m head month and you're making $80 a head, those numbers can get very, very big, very, very vast fast [they just suddenly] blow off the paper and that's why we said that -- I think what makes us unique at Smithfield is the -- in the pork industry we have got it all put together. We believe better than other people in the industry, but I am sure that there are other CEO's in the industry feels the same way about their company. But we feel very good. We don't let short-term results deter where we want to end up and we keep marching ahead. And I am very optimistic about the future. But there is no guarantee in -- certainly in today's environment. I am guaranteeing nothing. If you know what I mean, but that's about all I have to say.

Thank you Joe and thanks everyone for joining us today.

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