Smithfield Foods Inc (SFD) 2003 Q4 法說會逐字稿

Ladies and gentlemen, good day and thank you for standing by and welcome to the Smithfield Foods fourth quarter earnings conference call. At this time, all lines are in a listen-only mode. Later there will be a question and answer session. Instructions will be given at that time. We should require assistance during the call please press 0 and then star. As a reminder this conference call is being recorded and available for replay and the replay will begin today at 2 15 today p.m. eastern time through June 11 at midnight. Access the AT&T executive play back service. Dial 1-800-475-6701. With the access code of 686807. The number is 1-800-475-6701, and the access code of 686807. I'll turn the conference call over is to your host. Mr. Jerry Hostetter Please go ahead sir.

Good morning and welcome to conference call to discuss Smithfield Foods fiscal year 2003 fourth 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 10K for fiscal year 2002. With us today are Dan Stevens, Chief Financial Officer, Richard Poulson, EVP and Senior Advisor to the Chairman; Larry Pope, President and the COO; and Joseph W. Luter III, Chairman and CEO. Mr. Jerry Hostetter Head of Investor Relations. Larry Pope will begin our presentation with review of operations. Larry.

Thank you, Jerry. Good morning, ladies and gentlemen. Welcome you all to the call and I guess this is our third or fourth quarter straight quarter of us coming to you telling you it has been another quarter of weak hog prices and another quarter of weak fresh meat prices. The market seems to indicate this is the last time we will be making that call. I direct you to our earnings for the quarter of $5.1 million versus $24.9 million last year or 5 cents a share compared with 22 cents last year in the same quarter. We'll direct most of my comments this morning to the fourth quarter and not so much to the year. Since I think you have a good background of where we've been for the last nine months and focus primarily on the quarter in looking forward into next year. As you will note from the disclosure at the beginning of the press release we have changed our segment information to give what we hope is better information to you in terms of how we manage the business and how we look at the business. So I hope this gives each of you as analysts and investors a better understanding of how the business breaks down into its various segments. That being said, certainly we are not necessarily pleased with the earnings for the quarter. We realize that the environment we were operating in was tough. I think you know that it was a tough quarter. We do believe that we are managing this business for the long term and I will get into to that in just a minute or two.

Given that generally we are satisfied where we came out for the quarter realizing earnings from down. As I look at the business today I would like to review with you the four, five, or six negative aspects of the business and spend the rest of the time on the good aspects of the business. Hog prices this quarter averaged around southern Minnesota market Averaged around $35. That is well below our break even point for raising hogs. As a result our hog operation suffered for several straight quarters now. Fresh meat, fresh pork in particular, was very weak this quarter resulting in low selling prices and those as well depressed our profit ability on the fresh meat side of the pork business. A couple of our Mexican operations continues to show small losses as we move toward making some decision points down there all very positive but we made some production changes late last summer. Have not been fully been operational and we are making a couple of changes in strengthen the management team down there from the sales of marketing stand point that are going in place as we speak that will help us going forward but they are not there today. Our Turkey business was down about 75% from last year. It's still profitable but not nearly as profitable as it was last year. And, finally, you may have been reading about our [peneks] joint venture. We have some operating problems and experiencing some difficulties with our joint venture partner there. We are working through that with them and hopefully reach resolution on that in the first quarter of this coming year. Our case ready business is sort of flat with last year.

I know that's a general question you all ask. We don't see the case ready business growing like we did earlier. It is stable. We certainly do have some excess capacity there. And some of the conversations I've had with retailers they are simply trying to reach a point of difference and they are still at some level committed to case ready but in other cases they are committed to having a service oriented meat case and are not pushing towards a case ready direction. In terms of good news in the business we are managing what we can manage and I am extremely pleased with the job these companies and our operating companies have done on the process meat side of the business. Our bacon business, our ham business, our sausage business, both breakfast and dinner sausage business is excellent. Our frank and hot dog business is excellent. We have been growing both volumes as you've seen as we outlined in our press release but equally, more importantly, the fact that we've been able to grow market share. We are growing market share many times the growth in the case itself so we are strengthening our position in the processed meats area which utilizing our raw materials and makes us less dependent on the commodity markets for selling our fresh meats and giving our outlets to maximize value for raw materials and that is going to be a substantial benefit to this company as processed meats has been the highlight of this year. And it continues to be very, very strong into the fourth quarter. And gives us a tremendous growth in our base business that I see helping us in a big way going forward.

Our beef business probably don't need to tell you is excellent. Everyone in the industry is achieving near record profits on the beef side. I will tell you we are as well and I will tell you our margins on beef are equal to or better than the industry. So Rich Vesta and his time has done the tremendous job. We have good operations, good people running those and good sales people so beef is very, very strong. Beyond just the growth in the categories of processed meats, I am extremely pleased with the fact that our base business is growing all directions. Our food service business, our retail business are both up fairly dramatically and as well as outlined in the press release our newly formed deli group has achieved 23% growth margin in volume and we have sizeable growth in margins as well so that whole business and I hope you get the point that I am very pleased about the base business growing and is growing very solidly in all directions. Highlighted in the press release the fact that the company we have announced a merger of Smithfield packing company in terms of operations. We are not merging the retail sales forces and we have formed a new food service division to represent those two operating companies. We see significant synergies associated with that.

We previously announced that. We are beginning to implement some of those as we speak and we believe they are still to come in the second and third quarter but [Louis Lull] has announced his retirement on Smithfield packing company on September the 5th but we are already implementing some of the synergistic changes in terminate of combining redundant overhead areas and we're focusing on the manufacturing and will logistics area with quiet honestly will be the majority of the synergistic benefits will come from it will not be staff reductions. It will be better utilization of raw materials and better utilizations of manufacturing facilities closest to the point where they should be manufactured and closest to the point of delivery to the customers. And there is where the big savings will come. Our quick to fix operations in Texas, we have reduced the losses in that company by more than 75% and we have some business on the horizon that is pretty much firm should put us in a profit situation in that organization by the second quarter of new fiscal '04. We as well for the quarter reduced our losses in Poland by 80% and I am pleased to say for the year Poland was profitable and this is our first profitable year in operating that company and all credit goes to management team in Poland. Before I give you anymore of my thoughts, I would like to give opportunity for Dan Stevens to provide some of the financial highlights that might be helpful for those of you keeping those type of things that I know you ask on a routine basis. I am going to ask Dan to address some of that at that point. Dan.

Thanks, Larry. Larry had mentioned we did have a change in the segment reporting. We also had a change in the income statement where we reclassified depreciation expense back to costs and sales and SG&A. This change I think will make it easier to compare the results to industry peers and give better indications of our gross margins versus just the operating margin. Relevant numbers for the quarter and the year for the quarter depreciation expanses was 44 million compared to 37 million last year. Year to date depreciation expense ran 165 million compared to 140 million last year. Both quarters and the full year period amount reclassified to costs of sales right at 90% with the other 10% SG&A. Previous period that 90/10 relationship is fairly constant. Depreciation and amortization along with 20.8 million of interest expense and pretax earnings of 7 million. EBITDA for the quarter was 74.3 million compared to 100.6 million in last year's fourth quarter. For the year, EBITDA totaled 306 million compared to 553 million last year excluding the IBP gain of 7 million last year. As you'll see in the press release table, SG&A was down some 13 million in the quarter that principally on lower variable selling costs and lower marketing and distribution costs. Interest expense was down slightly in the quarter, despite some slightly higher borrowings on greater proportion of lower rate flowing debt. Balance sheet changes end of April, capital expenditures for the year were 180 million compared to 171 million last year. As you know and as we talked about last quarter, we did had some significant process meat expansion projects completed first part of year. As we mentioned last quarter capital expenditures second half of the year down from previous year as we cut our cap ex spending until cash flows returned to more normal leaves.

In the quarter dead increase by $45 million to $1.7 billion. Debt to total capitalization has creped up to 57 %from 55% in the quarter, and part of this is due to a minimum pension liability that was recorded in equity as of year-end. The word no share repurchases during the quarter. For the year shares repurchased was 949,000 shares average price of about 17.50 or just over $16 million. Our share repurchase authorization currently stands at 1.2 million shares. Finally in terms of the company's liquidity during the fourth quarter we upsize the U.S. resolving credit facility to 750 million to 900 million and in May we did a $350 million, 144-A offering and those proceeds were used to reduce the outstanding borrowings under the U.S. revolver. After the upsizing of U.S. revolver and $350 million bond deal and availability under international facilities we currently have close to $600 million in availability liquidity.

Thank you, Dan. Looking forward to the first part of fiscal '04 as we indicated in our press release, we are extremely I'll take the word extreme, certainly optimistic the term we have been talking about for some several quarters is here upon us and is occurring as we speak. As you well know, hog prices have risen some 30% in the last 60 some days and in fact I can report to you the hog market was up even strongly last night again up another $1.30 to close nearly 46 cents as the base Iowa, southern Minnesota market. Hogs actually sell above that by 1 to 2 cents a pound above that so we are achieving something north of 47 cents a pound for hogs today.

Certainly that's far beyond that $35 below break even point of the past and so from a raising standpoint we are clearly in the black for the first time in quite a long time as well which is also very reassuring from my standpoint. The fresh pork pricing has firmed up fairly dramatically here of late and the loin market was up another 5 cents last night. The butt market was up as well and so were bellies so we are seeing that the fresh pork cuts are tracking now with the live hog markets which bodes very well for us that our fresh meat margins generally decline when hog prices move up our fresh meat margins are maintaining themselves as these markets are moving up and that should be very good for us as we go forward generally the summertime is the weaker time for our fresh meat results as demand is lighter but given where the beef markets are at this point fresh pork demand is strengthening very, very dramatically and looks very very good as we go into this first quarter. I don't need to tell you the beef complex is excellent. The month of May was excellent. I guess we will see where the resistance point will be at the retail level at beef prices but clearly today with the Canadian border closed that this is a -- it's very, very good for the beef side of the business and we'll just have to see where that goes but at this point it is extremely good. I guess from the other side our processed meats business continues to be very, very good. South slaughters continue to be above last year.

We saw the south slaughter start about 30 months ago now, beginning of May of last year, April or May of last year. [Inaudible] continued to be up which in the futures markets are indicating some pretty strong hog prices out through the summer and into the early fall. So all of that from my standpoint plus the fundamental growth in the base business that we have done and the management changes which was made and we have made in Poland, the changes we are making at quick to fix the things we are doing in Mexico all lead and as well our synergies that we are achieving at Smithfield in [Inaudible] all leads me to very optimistic as we go forward. We have said this before so I will be caution when I say that. These markets are unpredictable and we have made the comments before the markets are turning but it certainly does look like this time as of today we have turned. Unless they turn back we are in better shape. With that being said, Dan, Mr. Luter and myself, Mr. Poulson will be glad to take questions you have.

Ladies and Gentlemen at this time, if you have a question, please press 1 on your touchtone phone. You will hear a tone indicating you been placed in queue, you may remove yourself from queue by pressing the pound key. If you are on a speaker phone pick up the hand set before pressing the numbers. If you press 1 prior to this announcement, we ask you please do so again at this time. Once again if you have a question please press the 1 on your touchtone phone. First question will come from the line of Christine McCracken. Please go ahead.

Good morning.

Good morning, Christine.

Larry, you did not talk at all about your intentions towards farm land and it seems like there's been quite a bit of news circling around that ongoing situation. Wondering if you could bring us up to date on that and what your intentions are.

Let me touch a second and then I am going to refer you to Mr. Poulson. We have indicated on many indications we have a continuing interest in farm land although this is a very solid company. If we never acquire farm land this company will be just fine. But in the interest of not saying something we are not supposed to. Mr. Luter and myself I think maybe you will make some comments of what we can say, dick.

Christine, we have a confidentiality agreement with farmland that restricts what we can say. It is a matter of public record. We have had an interest in farmland and that's an ongoing interest. I think it is unfortunate in many respects this has been a very extended chapter 11 proceeding. Certainly it is no secret that the management at farmlands the at the holding company level would like to do a stand alone internal re-organization and not sell the pork assets. They have stated publicly that there were no worthwhile offers for the pork assets when they went through their procedures several weeks ago. I think the difference we probably had with farm land is probably a question of value. They may well be relying on what some praises said the assets may be worth but the true value of asset is what someone is willing to pay for it.

If you were able to get the pork assets do you feel at this point given your debt levels that you would be able to finance this or would you issue stock?

I guess we'd say, Christine, that is something that -- let me from a short answer I think the answer could we finance this, the answer that's yes. Would we probably have to issue some stock the answer to that is probably yes as well. I don't think there's any problem financing the pork assets for farm land. I will say that.

Christine we can write a check if we want to buy the issue. Whether or not we want to have time to issue the convict at the same equity at that time.

What debt level, and maybe this is the question for Dan, what are you comfortable with in terms of total debt?

Christine, we are certainly at a debt to total cap today of 57%. We are probably pushing the limits and that's why Larry says we probably do some form of equity. When we've done major deals we've generally done a fairly significant portion in equity so I would expect that if we did a farmland deal there would be some portion of equity.

This is Joe Luter. We are still going to hold through our policy. We are not going to do the transaction unless we do believe that it is accretive to earnings on a per share basis.

That's good to hear. Thanks.

Our next question will come from the line of Andrew Wolf from BB&T markets. Please go ahead.

I was going to ask about farmland, too, and hopefully some things you could talk about. Reiterate why it is attractive to you and address both pork and potentially beef if that is of interest to you. On an earnings basis not on first year accretion basis respect. You know as you invision what you would pay for it essentially, what kind of earnings power accretion would you get out of what you would be interested in buying it at farm land.

This is Joe Luter and I will answer it. [Inaudible] if you would like. First of all, we are not particularly understood in the beef side of the business. What would be be interested at a price, the answer would be yes but our primary interest is the pork side and, quite frankly, we think that organization with John Morrell there would be quite a few synergies and we do believe we would be able to increase the earnings to where it would be, you know, accretive to earnings and they have a very big process meat business that's attractive, not a fresh meat company like ConAgra. We have made an offer that we think is full value. Obviously, there's a disagreement on that point and, quite frankly, we don't know where the negotiations are going to go but we're going -- we're firm in, you know, we have -- we've put our best put our best offer on the table and that's it and if we do the transaction it will work for us. If we don't do the transaction, as Larry said, we'll just move on and not worry about it too much.

That's fine. The truth is always a defense.

One quick follow-up if I could. Do you believe if you get the pork, the farmland pork business you can raise their operating margins to Smithfield's year.

Yes.

Joe, let's be clear. Andy let me clarify how you asked that question because I don't know whether you're defining our operating margins within the pork division or you are looking at the total P&L which has the impact of hog production are those margins. I think Mr. Luter and I feel very strongly we can replicate our margins on the meat side. Obviously when hogs are good our margins look better because of the profits of hogs flowing through the margin line.

When I said yes, I was referring -- I was referring to the pork process and margins that we currently have and in particular John Morrell and John Morrell and his earnings are substantially better and we expect that we could increase the earnings of farmland plus has a great deal of synergies that we could put into place in a way that would be accretive to earnings. As I am saying we are not going to stretch and to get bigger just for the sake of getting bigger if it is not going to help our earnings on a per share basis, there's no need to do the transaction. We are only interested in our -- we are in the interested in volume growth unless it helps the earnings per share and that's the discipline we've had in this company since I've been CEO and we are going to maintain that discipline.

One last question on this is I understand the bankruptcy court judge has given farmland management to the end of June or extended their -- is that your -- consistent with --

Dick is closer to it than I am.

Yes. There was a recent court order. We have They have until the end of the month to file a re-organizational plan and then I think until the 30th of June to try to get it confirmed.

Thank you very much.

Our next question will come from the line of Anne Gurkin from Davenport. Please go ahead.

Just a couple of questions. Can you just refresh your the expansion into the deli business, what percentage of the rollout has occurred and what kind of growth you are looking for in '04.

I guess I would ask you and I'll be glad to take that question. We are looking -- let me answer the second question first and then I am going to ask you about the first one. We are believe that the opportunities for the deli growth continue for the deli business are very significant going forward so, I mean, I will tell you that I have some goals from the deli department, the deli group to myself that are very ambitious but I don't believe that the growth that we are seeing today has certainly plateaued by any stretch. I think we are just beginning to get full stride here. So if you see the number that are in the press release, the 23% we printed, I mean, those are the kinds of growth opportunities we think are there. I am not sure when you -- I am -- when you said the full rollout, our deli group is sort of up and running. I am not sure I know the answer to that one.

Okay. That answers that. And then can you give me capital spending forecast for '04 and what tax rate we should be using.

Mr. Luter may have his own comments. We don't do detailed capital budgets. We believe we approve capital for capital expenditures as it makes sense in this business and we are not going to be tied to -- we certainly use depreciation as a guide and we alter that depending on the profit ability of the business. We believe we need to invest in this business and we are committed to capital spending but we are not out there saying we have $180 million of depreciation and we are going to spend $180 million.

What about tax rate for 2004.

On tax rate you can probably use 34% as a good bench mark. As earnings return to nor normal levels you will see that our tax rate will inch up a little bit.

We talked about farmland. Any other acquisitions in the pipeline? Any other areas?

We are looking at -- well, the answer is yes but the answer would have been yes if you would have asked me that question in any of the last 25 quarters I suspect but, yes, we will be meeting as early as tomorrow to discuss a possible acquisition, nothing the size of farmland but significant. We are always looking at opportunities.

Are you close to announcing anything?

I'd rather not answer that question. I think a lot will depend upon the meeting tomorrow, quite frankly.

Thanks very much.

Our next question from Eric Katzman from Deutsche Bank.

Good morning, everybody. I guess first question is in terms of you didn't mention feed costs. Obviously, the futures markets in terms of feed costs are quite high relative to kind of what [WASTA] is saying. Can you mention what your feeling is in terms of feed costs for ’03 or fiscal 2004.

Joe, you want to take that.

Well, if I can answer that question with any degree of certainty I would be a rich man speculating on the green futures but, generally speaking, I think the general consensus in the industry and I was talking to sparks last week out in San Francisco at a [Inaudible] bank meeting and I think generally speaking we believe that the grains are going to be relatively cheap in the next 12 to 18 months. Now, here again, this is really all dependent upon weather conditions in various parts of the world. But I think there's a general feeling we are going to have with, you know, the [AG-bill] effect and planting intentions to some degree plus what's happening in the world that unless we have a severe weather failure grains are going to be -- are going to continue to be cheap and cheaper.

Is it fair to say that you are not hedged at the moment and you are waiting for futures to come down before you lock in?

No. We are as I have indicated in the past we are not going to, you know, get into too much discussion on what acquisitions on hedging. I just don't -- that doesn't serve Smithfield's interest but, you know, if grain got real, real cheap we would hedge if we think it's adequately priced we don't hedge. It's just that simple. But I just don't want to get into telling the world exactly what we are doing.

Okay. And I guess Joe and Larry in the past when we've gone through a down cycle you've used the scale of the business to double down. This time around, you know, I guess other than farm land we really haven't seen much in terms of M&A. Was it that the sellers prices were too sticky?

Well, to be honest with you, we haven't -- we haven't -- we've looked at various transactions but except for farmland it really hasn't been any major disagreement on pricing. I will say in my judgment and, you know, just my judgment alone, that that farmland is -- has got expectations that do not reflect the marketplace and no one is out paying top, top dollar for meat processing companies today but you can say that for most companies in most industries today. So there is a little more cautious out there today than there was a year ago because of, as you know, what's taking place with the general economy. But there's still some opportunities out there and we've been active in the past and we expect to be active in the future and the key thing that I think you have to remember is people have been listening to me for many, many years, I tend to talk in four-year segments and we always have -- we usually have a pretty weak year every four years is what we've commonly referred to as the hog cycle and we do believe we are coming out of that cycle as we did in '98 and as we did in '94 and as we did in '90. So we -- so now, you know, we believe that we have bottomed out and there might be some acquisition opportunities within the next six months but we take opportunities as they present themselves. We don't grow just for the sake of growing as Larry mentioned earlier.

Okay. If I can follow up on Ann's question. Obviously we have an even tougher time trying to model, you know, what hog prices and returns are going to be or beef prices and returns but, I mean, where do you think DNA is going to be for the year so we can get maybe some kind of clue as to what CAPEX.

I have no idea what it is going to be M&A.

D&A.

He is asking about depreciation and amortization, aren't you.

Yes.

I'm sorry.

You are talking about for '04, right.

Yes.

I would suspect that depreciation would probably run just over 170 million and our amortization runs about $2 million a quarter.

That's $180 million.

Okay. And how much for the restructuring that you are doing that you mentioned in the press release between [Inaudible] and Smithfield. What kind of savings are you talking about there? Is there a cash cost involved in doing that.

Eric, I will tell you there are no -- the -- I am not calling it a restructuring, it is a merger. We are trying to get benefits. Not because either one of those two companies are in trouble. I want to clear that. But we are doing this to enhance the manufacturing capacity utilizations. There's really no CAPEX associated with having to do this. We are simply it is not a CAPEX cost associated with that and we are at I guess as we go forward in this process, we are identifying the synergies and those will come by one by one by one by one and I don't know that we've put a -- I've got some numbers but I don't want to give those numbers but it's significant but it is not dramatic if that's the question you are asking. It is part of an ongoing I want to call it a strong fine tuning but it is a fine tuning of this business to get all the cost out that we can and to be most competitive in the marketplace but it doesn't take a lot of CAPEX to do that.

Okay. Thank you.

Our next question is from the line of Jennifer Hills (ph) from Goldman Sachs.

Could you provide for details on the performance of your food service business, more specifically your business with U.S. food service. Is it buying normal levels and if it is not is that business currently being picked up by other distributors.

I believe we don't like to make comments on individual customers but I will tell you that our U.S. food service business is strong and I will tell you that our volume is up.

Okay. Can't be anymore specific than that?

I would rather not for the mere fact that I am probably helping our competitors more than I am helping myself by giving you that kind of information but we are not -- the things that are going on at U.S. food service are not adversely affecting our business with them.

Okay. That's my only question. Thank you.

Next question is from the line of Bill Leach (ph) from Banc of America Securities. Please go ahead. Mr. Leach, your line is open.

Actually, we didn't have a question. Sorry.

That's quite all right. One moment for the next question. Next question from Karen Eltrich (ph) from Goldman Sachs.

Two questions in the last cycle when protein rose up you guys did a phenomenal job of holding on to your pork processing margins. Now on a beef operations how much of impact do you have expect to have of rising prices? And second, very curious to hear your thought on mad cow how likely it is to hit the U.S. and what the ramifications will be for your business.

Karen, let's see if we can answer the first one and I'm sure Mr. Luter will have some comments himself. I guess I just made the comment as we started this thing that fresh pork pricing has been weak for nearly 12 months now and in respect to where hog prices have been. Hog prices have moved up quite honestly the supply all the proteins particularly beef and pork have been declining and it is that oversupply that's being worked off that’s helping all of the proteins. The beef people are just having exceptional profits but of recent it has been very recently the fresh pork has now picked up and we predicted at some point that would happen, hog prices would return to more normal levels and hog pricing to more normal levels and you have retail that can feature beef and feature chicken. It doesn't have to feature pork or one or the other. It is when all the proteins are not in an oversupply state all the proteins can have pricing levels that make sense and we've not had that situation on fresh pork for a year and now with the supplies of all of those declining everybody is price is moving up. So I hope that answers that.

But this is just been in the last couple of weeks. Keep in mind that even two, three weeks ago the margins on fresh pork were about as bad as I've seen them and they have improved in the last ten days, two weeks, but keep in mind that fresh pork margins historically are very, very poor in the summertime. Beef margins are usually very good in the summertime, and processed meats are generally pretty good in the summertime with bacon and hot doings doing extremely well. I think the key thing about Smithfield is when you are in Turkey and beef and processed meats plus refresh meats and pork and you are also in international and what's happening international does not usually correspondence with what's happened domestically with regard to profitability because of significant trade barriers between countries. We are not going to hit on all six cylinders at the same time, so to speak, but that's a certain strength that Smithfield is usually when one segment is doing poorly the other segments help to offset it. As Larry said two or three times this past year was unusual in that we did have low hog prices but we also have very weak margins on fresh pork but that was attributable to an oversupply of all proteins this past 12 months, be it poultry, be it beef, or be it pork and it appears that all three proteins are going to have less product to sell in the next 12 months and that always -- it's always help the profitability in the past, whether it does in the future, here again we expect it to but one thing we've learned about this business that no guarantees. The only thing that is constant is that we do very well over three, four, five year segment but we will have some severe ups and downs in certain years. That's just the nature of the industry that we're in.

If you can give the comment on that mad cow.

Mad cow, I don't have anymore information than anyone on this conference call quite frankly. Do we see it as a big risk? The answer is no. Do we see it as a risk? Yes. We are in world of zero tolerance and what all the ramifications are going to be I guess will depend upon whether they find any additional positives in Canada. It is my understanding they've only found the one cow and they've done I think the last time I checked was like 700 tests and they were all negative so is this something that's out there? Absolutely. But I'm not, you know, I have no ability to look in the future anymore than anyone else.

Great. Thank you.

Sorry I can't be more helpful but I think it's really a question that is worth -- the answer is worth more than one person's opinion and opinions are all over the place.

Great. Thank you very much.

Thank you. Next question from [Inaudible] from Lehman Brothers. Please go ahead.

Good morning. Could you give some color on your expectations for SG&A spending for the coming year. It looks a bit lower in the last two quarters than normal. Do you expect it to return to more normalized level of 8%?

Yeah, Bob, we do. This is quarter is a bit unusual in that with most of those costs are variable in nature so the operations were down as well as the cost level. But our general SG&A spending should be in the 7-8% range.

And it looks like fresh pork volume and processed meat volume throughout both pretty solid during the last quarter. Do you expect that kind of volume growth to continue.

I don't think -- well, let me say we are going to have slaughter levels that make sense from a P&L standpoint when the profit margins in the fresh pork is strong quite honestly the processing levels will move up. When hog prices move up, it's generally the fresh pork as Mr. Luter pointed out declining and we do cut the kills back associated with what we call bad cutouts so I would tell you that's not easily predictable. It will depend on how the cut out fresh pork demand is relative to hog prices. But for the most part we run these plants pretty close to capacity, five day capacity and we use Saturday as the overflow day and we can run nine hours a day but there's a practical matter we are running these plants seven to eight hours every day, five days a week, and we use overtime on Saturdays to flex the operations. So to respond to the marketplace. It's that simple.

And one more follow-up question. On the international front it sounds like homeland was strong but Canada and Mexico weaker. Can you give some color on what's going on in Canada and Mexico.

Let me respond to that because you may have gotten, Canada had not such a strong fourth quarter but Canada had a very strong 12 months. I don't want you to leave this call believing our Canadian operations are not performing well. They are performing very well and, in fact, they are right at record profit levels that we've ever experienced in Canada. So it did have a weaker fourth quarter but they had a very strong first, second, and third quarter. From a Canadian standpoint, we're very, very satisfied with where we are.

That's true but we don't expect the Canada to -- we expect Canada to be a little soft over the next 12 months compared to what it was this year. We have cycles up and down just like we do. I may be wrong but our earnings in Canada will be slightly less and earnings in Poland should be more and certainly more in Mexico. But these countries like the United States, you know, it is a business that does experience ups and downs. That's the nature of the industry.

And one last question. The proposed merger of operations between [Inaudible] what is the timing for that, the next two quarters?

We have already announced that. We have already began the merger, the formal transfer of operations occurs in early September but for all practical purposes we are making many of the operational changes as we speak today.

When do you think those changes will be completed.

Well, I made the comment in the press release that I thought we would be achieving some of the significant benefits beginning in our second and third quarter of fiscal '04.

Thank you.

We'll take a follow-up question from the line of Christine McCracken from Midwest Research. Go ahead.

Hi. Just wondering on one of your competitors, premium Standards come out and say they will comply with country of origin labeling. With the outbreak of mad cow country of origin labeling will come sooner than we thought or at least it is more likely to, that it will be implemented . You've talked about it being a positive in the past. Can you address how much it might cost you in terms of incremental cost of packaging or track.

Let me address this if I can, Christine. Country of origin labeling as a matter of public policy I think is wrong. At the same time, net net net I believe that it will be helpful to Smithfield if it goes in. That will be some bookkeeping costs in tracking these animals, obviously, but it is not going to be significant. Approximately 7% of the hogs that are slaughtered in the United States come from Canada either as [Inaudible] or market hogs. And in my judgment there are going to be a lot of packers that are just going to refuse to buy any hogs from Canada, not as anything being vindictive but if you do buy Canadian product, hogs, or meat that comes from Canadian hogs, you obviously are going to have to keep double inventories of all of your cuts and logistically that would be very, very expensive. Speaking of Smithfield alone, we would just refuse to buy any hogs that come from Canada because, quite frankly, we logistically we are just in the going to carry two different inventories of low ends, butts, ribs, picnics, hams, et cetera. It is just -- as I said earlier, it is bad public policy. But we think it will have a very positive impact upon the prices of hogs in this country because Canadian hogs do represent 7%. And that is significant. I don't think the politicians are fully when they pass this legislation they were fully aware of all the implications of such legislation but that's Washington.

Are you killing Canadian hogs now?

Yes. The answer is yes and but we can replace them then. There are people that are going to buy Canadian hogs but it -- you know, it's unfair, perhaps, to the Canadian producer in light of [AFTRA] but having said that Canada has had country of origin labeling for, I believe, my entire business career. They certainly have had it in the last ten years so they've done it to, you know, to protect their markets and, you know, and that was the purpose of the legislation in this country. But it inhibits pre-trade obviously and it goes contrary to what we were trying to accomplish with NAFTA but I'll repeat myself net net net less Canadian hogs come into the United States the higher the hog prices are going to be in the United States. So far very selfish reasons we like it, you know. As I said earlier, I do believe that it's bad public policy but at the same time it is bad public policy in Canada also.

Would you expect the Canadian slaughter industry to expand and absorb those hogs --

I think it will encourage that.

Would you expect investing or building out capacity in Canada?

No. We've exited the slaughter business in Canada when we sold that plant to [maple leave]. And we do continue to slaughter hogs in the Western providence of Canada our Michelle plant but most of that has not entered the United States domestically and to the far east but in my opinion net net net it will be helpful to America's hog industry and probably harmful to the Canadian hog industry in the long term but that's true of all trade barriers that artificially created and, quite frankly, the Canadians have been guilty of this for years and Europeans have been guilty of it for century.

Thanks.

Operator we will take one last question.

The line of David Nelson from First Boston. Go ahead.

Good morning. Where do you on a spot basis where are your feed costs break even, is your break even today, please?

It's right at 40 cents.

All right. On beef, please, was slaughter about 500,000 head in the quarter?

Just a little bit above that.

Great. In terms of packing which has been as you both Larry and Joe noted so weak until recently was that a result of lack of discipline upon the packing industry in terms of why fresh meat didn't rise anywhere near as fast as hog prices?

Generally speaking, yes.

Okay.

I mean, as I said earlier, David, the earnings were horrible on the fresh meat side of the business but at the same time hog prices were increasing substantially at the same time net net it was good for us because we're vertically integrated but losses got up to $8 a head at one time and Larry I haven't seen the figures the last day or two but it is close to a break even about a dollar black today is it not.

That's right.

So you've had a swing of $8-9 per head in the last week or two on the fresh meat side but you've had a rather significant increase as I'm sure you track. And, you know, one thing I would encourage all of you that follow Smithfield, I mean, it's public knowledge what the hog market is every day. You can pick that information up right in the Wall Street journal and we're raising about a million 100,000 hogs per month and it is pretty easy for you to track how well or how well we are not doing on the hog production side and that has a major impact upon our earnings.

One last in the marketing area. Any final comments on efforts regarding lean generation or some of the further process of microwaveable items?

Nothing of -- I mean, David, I don't know if you were on the call the entire time or not.

Yes, I have. They didn't call on me. That was it.

Okay. I didn't -- we don't have any major, like the northeast marketing campaign we don't have anything like that going at this point. We are in a what I call the traditional trade and promotion area. But all of those categories for us are really going very, very well and we are about to open two new microwave lines and a new plant that we acquired and quick to fix operation. We have built out a facility there in [Sioux center], Iowa, which will be completed the end of this month, early July which will give us 20% more capacity on the precooked bacon side of the business. We are continuing to build capacity on that end and as I said earlier, the traditional categories for us have really been just exceptionally strong. I think we paid a lot of attention to processed meats. When we are not paying so much attention now we are focusing on margins and focusing on growing our market share and we have attention there and it is showing up in the numbers.

Great. Thanks very much.

Joe, we will offer you an opportunity for closing remarks.

Jerry, I don't know. I think we've pretty well have covered where Smithfield stands today. I will just, you know, I'll just emphasize what I have been emphasizing my entire business career is when you look at Smithfield, you have to look at Smithfield in a time capsule much longer than a quarter or even a year and you have to continue to look at us long term and I suggest in four year segments. When you look at Smithfield in that way, I think, you know, we've had a very positive company but we are the has been and there will be in the future, you know, some ups and downs and a -- not a 100% predictability on what area profits are going to be but we do believe we have in place the best business model in the pork industry and we've got a strong beef company and we've got a strong turkey plant that we own one half of and we are pretty optimistic despite we've gone through a tough year but we did the same went through a tough year four years ago and eight years ago and generally speaking, we are pretty optimistic, you know, for the next few years and we'll probably have a down year, you know, four years from today. That's just the nature of the industry. But on each down turn we normally come out stronger. We had very weak hog prices for the last year but we went out and bought a fairly large hog operation in the southwest and we probably going to buy another one in the next few weeks in the west and so we do what we've done in the past, we tend to buy assets when they are in disfavor because we believe that we can buy them at more attractive prices when companies are in disfavor and than when the industry is doing well. That philosophy has serve us well in the past 25 years and expected to serve us well in the future.

Thanks to everyone for listening in today.

Ladies and gentlemen, that concludes the conference for today. Thanks very much for your participation. Using AT&T executive teleconference. You may now disconnect.