Smithfield Foods Inc (SFD) 2004 Q3 法說會逐字稿

Welcome to your conference call with Jerry Hostetter. I'd like to remind everybody that today's conference call is being recorded for basic replay purposes and transcripts and purposes. (OPERATOR INSTRUCTIONS) Thank you for using Sprint conferencing services. I'll turn the call over to you now, sir.

Good morning and welcome to the conference call to discuss Smithfield Food's fiscal year 2004 third 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 2003.

With us today are Dan Stevens, Chief Financial Officer; Richard Poulson, Executive Vice President and senior adviser to the Chairman; C. Larry Pope, President and Chief Operating Officer; and Joseph W. Luter, third 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.

Thank you very much, Jerry. I am very pleased this morning to announce the results of our third quarter where we are reporting $46.1 million this quarter compared with $5.3 million in the same quarter last year. That equates to 41 cents a share compared with 5 cents a share in the prior year, and for the nine-month period it's 104 million versus 21 and 94 cents versus 19. So I'm extremely pleased with those, particularly given some of the environmental issues facing us, particularly on the beef side of the business in the latter part of the quarter.

As many of you know, the third quarter of Smithfield's fiscal year is generally the best quarter of the year. And we are very pleased with these results on an overall basis. As I look at the business today, entering into our fourth quarter, our third quarter results reflected somewhat weaker per-unit fresh pork margins as these hog prices have rebounded fairly significantly. We expected this rebound in hog prices and those have dramatically reduced the losses that we were experiencing at the farms.

The effect of that is increased raw material cost both at the fresh meat level and the processed meats level -- the processed meats business which did adversely to some degree our per-unit margins. With that being said, I am extremely pleased with the results of these companies in terms of absorbing these cost increases, and in the keeping abreast of those markets and terms of our pricing on the fresh meat fronts, and as well on the processed meats front. Our processed meats business is extremely strong.

We had a very solid holiday season, the Thanksgiving and Christmas periods went very well for the Company. And as well, our fresh meat margins and our volume continues to move very nicely. As you saw from the information we presented in our press release, the showed volume increases in both fresh pork and in processed meats. So demand for the product on the pork side of the business has been very good.

The big negative affecting the business today is obviously the downturn in the beef margins towards the -- following that BSE incident just before Christmas and that certainly had a dramatic impact on our beef profitability in the latter part of the third-quarter. We did highlight in our press release the fact that we did have $11 million in BSE related cost. We attempted to outline for you how those costs were calculated and the ways in which they affected the business to give you some background and feel for that. With that being said, we are still -- our beef profitability, adjusting for that $11 million, are essentially the same as they were last year. So, our beef business and the job that Rich Best (ph) and his group do is excellent, and I couldn't be more pleased from that standpoint.

Other parts of the business that you should be aware of is our turkey business has turned around very nicely. Turkey profitability, which we own 49 percent interest in the fifth largest turkey operation, was up very nicely, in fact more than double last year. Another good area for the Company is the international front which is reflected in the other category in the segment information. Our Polish operation that we predicted had some weak first quarter earnings, those numbers, as we predicted, have turned around very nicely.

In fact, we are extremely pleased with our Polish operations today where our profitability, which we were profitable last year, is really double last year. Our French operation, which is well (ph), suffered some weak pricing in the early part of the fiscal year ,just turned around very nicely. And I can tell you today that those projections that we thought were going to happen in the second quarter happened and are into the third quarter and we're expecting those numbers to again be very strong.

The only weak part of our international operations today are in Mexico and that's relatively -- relatively modest to small losses, and we've made -- for those who are not aware, we've made a management change in getting a new president in there who's got an awful lot of experience in the industry to run our Mexican operations. He went in place in December and so he's just beginning to get his feet on the ground and get a handle on the business. And so we think we've got at least the management changes there to begin to turn Mexico around.

I'd like to turn my attention for just a minute to the acquisitions front. There are two I'd like to discuss, one being the Cumberland Gap acquisition we made late last summer. The results that we have seen from that through our first holiday season and Cumberland Gap, being primarily a smoked meat operation, was very strong -- was very strong in terms of profitability in our level. And given the information we have in Cumberland Gap, although those are not audited numbers, compared to the numbers they reflected internally themselves they're very, very strong year-over-year to their internal numbers.

I'm sure all of you are interested in what our comments and our thoughts are relative to the integration of Farmland into our business. And I could not be more pleased. I think Mr. Luter's comments in the press release that he made are directly on point. We are very pleased with the Farmland acquisition. We indicated early on that we thought that we were acquiring a very strong management team in the Farmland organization, and I can confirm to you today that the results we have today more than demonstrate to me that we have a very strong management team in place in that organization.

We have really not had to make any changes there. That was an organization simply was within a co-op system that has now been liberated (indiscernible) to pursue what I'll call capitalism, and at this point, they are reacting very, very well to this Smithfield environment. They have added an entirely new dimension to our Company by giving us another benchmark organization to compare many of our operating statistics across the organization, and we are making changes both at the Farmland organization level in terms of operating improvements and as well our Smithfield, (indiscernible), John Morrell and Patrick Cudahy operations. They have shown us some areas of the business that we can make improvements here. So, we cannot be more pleased with those results, and in the first three months that Farmland has been part of the organization.

As well, we have been in a position to effect through Farmland some cost savings and improvements at the Farmland organizational level. Many of those are just now getting some good grasp under them in terms of creating some numbers of some value. I would tell you the synergies usually take a little longer to occur and not so many of those that happened at this point, but there are fairly significant cost savings that are occurring at the Farmland Foods organization that -- but again, many of those things we saw and had predicted even before the acquisition occurred, and that was simply an issue of execution. And George Richter and has team have done a good job of executing against those cost savings ideas that were already identified even before we closed.

Before I give you -- I guess the only other points I would tell you, our deli business continues to be strong. As we indicated in our press release a number of the precook categories in the Company and our bacon business is just excellent. Some of our sausage categories are just excellent, our precooked categories are doing well. So you can tell the optimism in our voice. I could not be more happy with this organization. But before I give you any outlook going forward, I'd like to turn it over to Dan Stevens and let him work you through some of the information. I know each of you want to sort of fill in your worksheets and get that information for your tracking.

Thanks, Larry. Good morning, everyone. First off, I just want to point out a couple of things to keep in mind in reviewing our quarterly results from a comparability standpoint. First, as Larry mentioned, Farmland Foods was acquired on October 28th which means that reported results for the quarter include Farmland for all but the first couple days on the front end of the third quarter. Farmland's pork processing operations are included in the Pork segment and the raising operations are included in the HPG.

Also in the third quarter it was a 14-week quarter versus a 13-week period last year. Obviously year to date is a 40-week period compared to 39 weeks last year. For those of you that are familiar with the 52-53 weak fiscal year convention you know that every few years you get the added week and that happens to be this year for us.

As well we had a couple of nonrecurring items in this year's third quarter. As Larry mentioned, we had $11 million of BSE related charges. That $11 million breaks down between inventory and accounts receivable writedowns of $7.7 million as well as $3.3 million for operating inefficiencies in the plant due to a lack of available cattle supply. As well, we had about $7.5 million of interest costs related to the bridge financing. This is the quarterly impact and we expect that that bridge financing will be rebid during the fourth quarter, so that -- and that pretty well offsets the -- net income from discontinued operations at Schneider.

As we discussed last quarter, Schneider is being treated as discontinued operations. The net income of Schneider is one line on the income statement. And beginning last quarter, we did realign our segment presentation so that the remaining international meat processing operations, which include Poland and France, our Mexican operations and our Chinese JV along with our turkey operations are included in the other segment.

Obviously the inclusion of Farmland and the added week had a fairly dramatic impact on the income statement for the quarter. As you can see, our sales were up about $900 million compared to the last -- or same quarter last year. Of this increase about $480 million is attributable to Farmland and 160 million is the extra week. The remainder is due to increases in the base business as well as other acquisitions.

SG&A increase about $45 million, most of that is due to Farmland and the extra week. Our SG&A as a percentage of sales actually declined a little bit to 6.3 percent. As you saw, interest expense was up $10 million, 7.5 of that is due to the bridge financing. Almost 2 million of that is due to the extra weak. Overall our average borrowing cost remains well below 6.5 percent. The effective tax rate remains at 34 percent for the quarter and for the year to date. And as I mentioned last quarter, I don't expect that the acquisition of Farmland or the sale of Schneider would materially affect our effective tax rate going forward.

Depreciation and amortization expense for the quarter was 49 million compared to capital spending of 41 million. Year to date depreciation and amortization is 129 million compared to capital expenditures of 107. Earnings before interest, taxes depreciation and amortization for the quarter was 149 million, an increase of 82 million compared to the 67 million we reported last year. So with the increased earnings and the seasonal reduction in our working capital, our cash flow from operations was really quite strong in the quarter. For the year, EBITDA from continuing operations was 354 million, an increase of 158 million, compared to the 196 million that we reported for the first nine months of last year.

Just taking a look at some of the changes in our balance sheet during the quarter, our total debt that we reported in our third quarter 10-Q will be just over $2 billion which will be down about $100 million from the previous quarter. This of course reflects our increased cash flow from the higher earnings as well as a reduction in our seasonal working capital requirements. Our debt to total capitalization including the bridge financing is about 59 percent. And if you exclude the bridge our total debt -- our debt to total capitalization is 56 percent which is down from 57 percent that we reported at the end of last quarter.

As you know, we do intend to repay the $300 million bridge financing with the proceeds from the Schneider sale, which we expect to be around $260 million, and we'll finance the remainder from the revolving credit facility. Lastly, as most of you have seen, we did acquire a 15 percent stake in Campofrio for $88 million just a few days following the quarter end. So we do expect that our debt level will be up at year-end compared to third-quarter. And finally, just to report there were no share repurchases during the quarter, and our current share repurchase authorization remains at 1.2 million shares. And with that, I will hand it back to Larry.

Thank you, Dan. An awful lot going on with the Company in terms of last quarter and this quarter. And I know you're all curious in terms of what our view is looking forward into the fourth quarter, and we've got Mr. Luter today who I'm sure will make some of observations during the question and answer period. But I would tell you, it seems like every morning we get up there's something else on the news that gives us some issue that we have to deal with in terms of this business.

Luckily, for the Pork side of the business, none of these are -- we're seeing the impacts of that as they effect pork, but they're never directly affected by many of the things that are going on. Our pork business is strong, and I think the effects that are -- the impacts that are occurring on the beef side of the business and now the poultry side of the industry, most of those on a bottom-line basis probably bode well for the pork business.

Our business does not have much overhang. We do not have any big issues that we're facing. We do have the impact that will occur from these export markets and how they open and close and what happens with the BSE and the SRMs in terms of the beef business. But I think all of that from our standpoint the pork side of our business should be the benefactor of that. And I can tell you that we have a very strong handle on our base business, our raising cost. I know you're concerned. Obviously the grain markets have moved up on us pretty dramatically here of late.

As we've mentioned many times in the past, we don't want to get into the details of our hedging strategy, but I will tell you that we use the commodity markets regularly to control our cost, and we continue to use the commodities market to control our cost. And so the only thing I can tell you this morning is we are not exposed to some of these market -- market moves that are out there.

The fourth quarter from a business standpoint, I think the company is going to do well. I think our international operations are going to be strong. I would tell you that our beef operations in terms of the numbers, the way we run the business are very strong, and I think if you check our numbers compared to others in the industry that you'll see that the profitability of our beef business is right up there with anybody in the industry. In fact, I'll ask you to do your own calculations, (indiscernible) showing the beef significantly better. So I think we've got -- in terms of how we run the business, how we cut the meat and how we sell it, I think Smithfield is right there on the beef side of the business.

On the pork side of the business, our organization is working closer together than they ever have in terms of our coordinated strategies with our customers. And in the margins that we're achieving on our fresh and processed meats businesses is just -- again, I couldn't be happier. There's always room for improvement and the margins are down because increased raw material. From my standpoint, all of that leads me to be very optimistic as we look forward to the fourth quarter. We certainly expect a very strong comparison compared to last year. We are just finishing our first month of the fourth quarter, and we're looking at a dramatic, dramatic improvement in terms of our comparison in terms of year-over-year on that.

I don't need to tell you where the hog markets are, so you know that now it's profitable on the hog side of the business and the other pieces of the business are very solid as well. So February is going to be a very strong comparison. I'm not going to go out there and tell you that's I'm going to predict March and April. With the way you have to read the -- what comes across the news services every morning -- March and April are still out there. But every indications are the futures markets are still pretty strong going into the -- through April and even through the summer. But from my standpoint the fourth quarter looks very strong for the Company and I expect us to have a very good fourth quarter.

One thing that Dan mentioned that I will touch on for just a second was the 15 percent interest that we bought in Campofrio. As you know, we've had a European strategy that we've been executing off and on against as the opportunities present themselves for the last four or five years now. It is part of an overall strategy, we do want to be a more significant player in that marketplace, it is a natural growth opportunity for the Company. And this opportunity for this 15 percent became available and we were approached about our interest.

In fact, we've been talking to the Campofrio people for some time, really for quite some time and have a good relationship with them. They are a very strong branded program in Europe, based in Spain, and we believe this gives us -- they were fresh pork and processed meats, although now, just at the end of the year, they have spun off their fresh meat operations and so they're a processed meats operation. And we believe that they have a lot of synergistic possibilities for us with our Polish operations, they have a very strong Polish operation in Morlini (ph) that can work very well with our Animex operations and we look forward to that. As well as they can take us into Western Europe in some of their other locations.

And we anticipate having some strong business ties between our European operations and their European operations. And it's a very nice addition to our position today in France and Poland. And as well, we are pursuing some other opportunities in Europe that I'm not at liberty at this point to discuss in any kind of detail except to say this is part of the strategy and I think a very good one. It's a very good organization. They are culturally very similar to the way Smithfield operates. They've done a number of acquisitions. They've got a lot of family basis in the business, the same Smithfield is kind of -- got family ties in the business. And the relationships between the companies have just been excellent. And as I said, they approached us about being -- taking a minority position in this Company and we'll see where it goes from there.

At this point, rather than me say all the things, I'd like to turn it over for a question-and-answer period, and Mr. Luter is here and certainly we're available to answer your questions. Jerry.

We'll take your questions at this time please.

(OPERATOR INSTRUCTIONS) David Nelson.

Good morning. Obviously a lot of internal progress with your acquisitions. But I guess I'd like to touch on a couple of macro factors. Hormel, when they had their call last week, commented on their expectations for a hog supply cycle downturn after many months, many quarters now of more hogs coming to market than was expected. I guess let me first ask for any comments you might have on that, please?

David, didn't they say they projected the markets at $42 for the rest of the year or something?

Yes.

I think that's the number I saw. And I was doing -- I think if you look, where we've got June hogs out (indiscernible) this morning and 48 in July, 46 in August and 44 in October, about 38 in December -- again there's not much liquidity there, 37-38. I think if you just do the mathematical average of that you'll probably get $42. I think you'll get that.

But we've had a situation where sows have been going down, but I guess due to productivity and probably some degree from Canada, hogs coming to market have consistently outpaced expectations.

There's no question that of the number of hogs coming to market in the United States, for the last three months it exceeded everyone's expectations, but primarily that's for a dramatic increase in the hogs coming from Canada. We do not see that abating. And quite frankly my guess is -- I can't predict hog prices, but I think that we're going to have just as many hogs this fall as we had last fall quite frankly. But we've got as many hogs let's say for the last three or four months as we did three or four months last year, but the remarkable thing is that we've had -- I mean, last year at this time we had roughly, if my memory serves me correct, hogs were averaging around $41 a hundred weight in the month of February, and this year they averaged around $47 a hundred weight in the month of February with the same number of hogs coming to market. I attribute that to the reduction of beef supply.

But I've said many times in these conference calls plus conversations with many people such as yourself, that it's virtually impossible to predict hog prices. I've never been successful at it and -- I don't know of anyone that predicted six months ago that we would have $47 plus hogs on the month of February with actually a slight increase of the number of hogs that they worked past last year. But here again, no one foresaw the BSE. So whether it's Hormel or Smithfield, to me it's -- I don't think there's anyone that's smart enough out there today to predict what hog prices are going to be six months from now because there are so many factors beyond everyone's control.

Our feeling here at Smithfield is that net net net BSE has probably helped our hog profitability, it's certainly hurt profitability on the beef side. Probably it's helped on the turkey side. But I think we have enough diversity in our operations that when we have probably one segment we normally have good results in other segments. But, I'm not smart enough to predict what hog prices of the profitability is going to be. This coming fall all I will tell you is that I personally think this fall is going to be -- is going to be good. And I think right now my guess is that next fiscal year will be better than this fiscal year. My instincts tell me this because of very, very strong demand, very, very strong export demand. Here again, weak export demand on the beef side, but we're not a big exporter of beef to begin with at Smithfield.

If I could ask one other question please, maybe this might be for Dick. I've heard from a number of people in at least the beef industry, be very dismissive of that legal case last week in Alabama against Tyson IBP. I guess -- but I haven't heard many people really discussing the legal merits of the plaintiffs. Dick, what might you think of that? What impact it might have on Smithfield?

David, I don't think it really has any impact on Smithfield. We had a similar case filed against us two years ago in Alabama, and we won it on a summary judgment upheld on appeal. I think that verdict against Tyson is a little bit illusory. It covers all cattle sellers, not just the ones that were part of the suit. The class hasn't even been determined yet. And frankly, I don't think that the views established by the plaintiffs are at all anywhere near the views established by most of the cattle growers and sellers. That is a group I think of dissidents who probably were not able to compete and were looking for a competitive edge.

Okay. Thank you very much.

Christine McCracken.

Good morning. Just a follow-up on Dave's question relative to production. Joe, I think, if I remember correctly, you've recently announced an intent to I guess cut back production sometime over the near term. Is that right?

Yes.

Is it your expectation that that would lead to higher hog prices let's say in six to nine months?

Well, it certainly should help some. I guess it really will depend upon whether other people will cut back production and whether the Canadians will cut back production. With the price of feeder pigs I think every feeder pig raised in Canada sold in the U.S. probably will be at a loss for the next seven, eight, nine months. That's just my guess. But, what we did, we took a hard look. We had feeder pigs leaving North Carolina and being fed in the Midwest, and what we did, we looked at how we could become not necessarily as big as we would want to be, but how could we drive cost out of the system. And we decided to shut down some feeder pig operations in North Carolina, convert them from finishing to put more hogs into the -- well, market hogs in North Carolina but less market hogs in the Midwest.

Net net net, we've gone from about 835,000 sows down to about 800,000 sows, and the key point that we made the decision, do we want to be the absolute largest we can be or do we want to be the lowest cost producer in the United States? And we elected to be the latter, and that was the basis of our decision. Hopefully other people will realize that really there's only one problem in the hog growing segment of that business today, there's just too many hogs for the demand that's out there, and just a 2 or 3 percent reduction would have dramatic positive impacts upon the pricing of hogs. We've seen that certainly in cattle on this past fall. So, we decided to do our part as one of the leaders in the industry and we cut back production, but everybody has to make their own independent decision on what is in their best interest and it remains to be seen what other people will do.

And these are permanent cuts, you're not intending to ramp up production say in another location?

No. It will be permanent. We may, Christine, buy additional assets in this area depending upon availability and price, but we have no intention at all of expanding our hog growing operations at this time. We think that that would be counterproductive. So I'm not going to rule out acquisitions, but I will rule out building additional capacity.

And just in terms of -- I guess relative to your acquisition strategy, you've been fairly active in the market. Obviously taking advantage of some opportunities that have come about. I'm wondering, given your debt levels, what is your appetite for incremental acquisitions and maybe what is your actual focus? Is it just to be selective in markets that makes sense or is there some bigger strategy here?

No, I think we've always been -- we try to be opportunistic buyers, and we don't have a preset game plan of how much we want to grow the next two or three years. It will depend upon opportunities that present themselves. We think we can easily enter the equity market if it makes sense to additional -- to raise additional equity for additional acquisitions, which we would do. If we made any major acquisition today we would probably increase equity, but right now there's nothing major in regards -- there's nothing definitive at all, but we may or may not make an acquisition this year. It will just depend upon what's available and at what price.

But as I've said earlier, I think we can still grow another 3, 4, or 5 percent in this country and then there are lots of opportunities, we think, in Eastern Europe in particular. In Eastern Europe we'll be able to compete very, very effectively with Western Europe within the (inaudible) community and we're moving in that direction. But, right now, we're looking at various things, but we're always looking at various things. There's nothing that's imminent out there today, but that could change next week.

Alright. Thanks.

John McMillan.

Good morning, everybody. I guess you have new segments for this quarter, is that correct?

Actually, John, that started in the -- started in the second quarter when we reclassified Schneider to discontinue.

But, you don't give an international earnings number do you or can you help us there?

No, actually the other segment now includes all of our international meat processing operations, excluding Schneider, along with our turkey operations.

But the bulk of it's international?

The bulk of it is international, that's correct.

And can you give us an idea what depreciation will be on a run rate? Is this $49 million on a run rate level?

Yes, there's nothing -- with the Farmland acquisition, John, that's probably a good number to use going forward. We had Farmland in there for the full quarter.

The only issue would be the 14 weeks, John, in there versus 13 weeks. I'm calculating not more like 185 or something.

Plus we'll eliminate the depreciation at Schneiders, of course.

Schneider is not in that $49 million number.

John, let me just remind you, that includes 14 weeks of depreciation.

Okay.

Depreciation next year should be, if I had to pick a number out of the sky, John, it should be I would say probably 185 (multiple speakers) and it could go to 190, and that's, of course, assuming no further acquisitions.

I know there's a lot of moving parts with BSE and bans and so forth, Joe, but probably a trend that is helping you quarter-to-quarter-to-quarter is this Atkins trend. What are you kind of doing to capitalize on it or what can you do in terms of marketing, product positioning, and how basically sustainable -- if these export markets close I guess we're going to need more domestic demand. So far we're getting it, but can you just talk about the broader issue of Atkins?

To me I've been very pleasantly surprised. The positive impacts that we got, beef demand in particular, but it also should affect pork as a result of the Atkins diet. But I view Atkins as a -- it's sort of at a peak right now. My guess is three or four years from today, John, there will probably be something else out there. I would love to think that the Atkins diet phenomenon will go on forever, but history tells me that probably will not be the case. But, I don't have any feel for it, John, other than I think it has helped, but the longevity to it, your guess is just as good as mine. I just --.

And just -- your beef strategy is focused a little bit on Holstein cows which obviously have been you would think negatively impacted by the mad cow issue. Can you just discuss that? I mean, you're saying your beef margins are higher than industry levels --?

If you just look at results for the quarter and look at -- even go back in the second quarter and look at the number of head we produce -- excuse me, that we process, I think we take back to no one. We had good results in November, and right on up into the last week of December, we had losses in January. We're now, I think we've got -- well, we expect relatively small losses in February, but I think that my instincts if not my guess is because we are in a Holstein sector, that on a percentage basis we'll be less impacted than the large processors of be it cattle. But next quarter's results will prove me right or wrong. But there it's no question it's taken us from some very good positive numbers to red ink.

We're not making money processing cattle as we speak, but my guess is next fall things will be settled down, the inventory that's come back from the far east will be behind us, the numbers will be down some on fed cattle but they won't be down as much on the Holsteins, and that we'll have a pretty good fall I think in beef. And maybe I'm wrong, but that's the way I see it. But if I had to saying net net net Smithfield, has mad cow hurt Smithfield? I would say the total Company the answer is no. It's probably helped pork as much as it's hurt us on the beef side and so I don't think the mad cow has -- I think it's sort of evened out for us. That may or may not be true for some of our competitors, but that's the way we view it.

Great. Thanks a lot.

Sorry I can't be more definitive.

You're fine. Thank you.

Leonard Teitelbaum.

Good morning. Let me try my hand at something here. Given what -- Joe, with the cutback that you've talked about and the extra interest etcetera, why shouldn't the fourth quarter be better than the third quarter?

It could very well be because, quite frankly, the third quarter we didn't make money on hogs until January. We lost money in November and December and made some money in January. But just take February, we should -- you all know that I told you our costs are around $40 and currently the market is around 47.5-48. So we're making $16 to $17 a head average up to $20 -- approaching $20 a head. And we're going to have -- we lost money in February last year, and we're going to make good money in February this year. So, my personal guess is that the fourth quarter -- comparisons to the fourth quarter last year are going to be much better than the third quarter, but I'll go back to my speech I give every time we have these meetings, and that is --.

No, don't give me the speech again. Don't give me the speech. Please, Joe, don't --.

I just can't -- it's an unpredictable business. But right now -- yes right now I do agree with you, Leonard, that the fourth quarter should be an excellent quarter and I think Larry conveyed that in his presentation a few minutes ago.

I'm just talking about the third quarter just reported.

Leonard, the only comment I would make to you is that the third quarter -- remember the third quarter has November and December which has Thanksgiving and Christmas in it. We get that big pop for our holiday ham sales and, quite honestly February and July are generally the worst two months in the meat business. Joe's right, we're having a good February. It's not necessarily a good February on the processed meat side of the business, it's a good February on the hog side of the business, and the cut outs are so-so. But it is possible, I think he's right, it's very possible we could have a better fourth quarter than the third.

And help me out with the interest in the fourth quarter here, if you could. Because between bridge loans, etc., we should have an interest probably about -- interest expense, excuse me -- we should have it the same as this quarter, shouldn't we?

No, because I think we will pay -- right now, I don't know exactly when we're going to pay down that bridge loan. That will depend upon the day we close on Schneider, but our best estimate, Dick, on the closing the Schneider is what date?

I think it will be before the March 15th, Joe.

Do you think it will? Okay.

So, obviously, we're going to have a lot of debt coming off the books during the next couple of weeks.

And that 34 percent tax rate?

I would expect you'll see that for the remainder of the year and probably even into next year.

Okay, sir. Dan, you had a question? What's going to happen -- my last question, what do you think is going to happen when we get pulling into the EU? Will that be a -- obviously, the answer should be it should be a plus, because a lot of questions get answered. But are you guys positioned now to take advantage of it, or is that really going to be a late '05 story? Or even '06?

You mean in regards to Poland, Leonard?

Well, basically Poland and what it means for the entire European theater with your interests over there?

Well, the whole idea was that we believe that the hog industry in Europe is located in the wrong part of Europe. Now with the EU, with all of Eastern Europe coming into the EU, we believe that the place to be is in Eastern Europe as the place to be in the United States is probably where the corn is in Iowa. We think by being heavily in the fresh meat business and we are raising more hogs every month in Eastern Europe, that is the place to be, and our processing plants are in France and Spain. France and then, of course, there is only 15 percent ownership in Spain at this point in time. But that is our strategy, and we are looking -- we are looking at another Eastern European country pretty aggressively as we speak. But that is our strategy of pulling Eastern and Western Europe together, and the fresh meat coming out of Eastern Europe and the processed out of Western Europe. I mean, it is just that simple.

Thank you very much.

Pen Jones.

Thank you very much. Just curious, in terms of exports with all of these foreign markets closed off to U.S. beef and now a lot of Asian chicken, how were Smithfield's pork exports this quarter?

Up significantly.

Is there any way to quantify the impact and what your expectations are going forward?

Well, we've got two things. Our exports -- let's be clear on this. We have a couple of markets in terms of -- it sounds like somebody's phone is troubling there -- but our exports have been strong into Mexico and our exports have been strong even North. Where we have not been as strong this quarter because of the gate pricing is Japan. So the gate pricing comes off in April in Japan, so I would expect our Japanese exports to pick back up pretty strong. They have been sourcing their beef out of Australia, what they wanted to. So at this point because of the gate pricing, you've got some limitations on the ability because of the tariffs to simply put so much in there. So I guess you've got a mixture here. I expect our exports which have been strong this quarter to be strong towards the end of the fourth quarter and then on into the summer.

I guess actually following up on Lenny's discussion about Europe, what sort of growth rates are we looking for out of Europe over the long term?

That will be dependent upon the acquisitions that we will make in the future, and we don't have any fixed growth rates in mind.

Because right now you said in the U.S. maybe three to four to five percent, and I was just wondering what is that like relatively in Europe? Is it high single digits?

Well, I expect that growth rates in Europe will probably exceed what they are in the United States, because you've got a much smaller base to start with. As I say, we have got one fairly significant area that we -- I can't talk about today because we're not far enough along. But I think the growth rates in Europe in the next five years will be significantly greater than the growth rates in the U.S.

One final question, if I may. You mentioned raising costs this quarter were flat year-over-year and consistent with the second quarter, and just mentioned the $40 figure. I was wondering how far out can we kind of estimate that the raising costs will remain at this kind of steady level?

That would require me to expose our hedging position, and I just refuse to do that. All I will tell you is we're not too uncomfortable with beef prices in the foreseeable future.

Great. Thank you very much.

One of the things I wanted to make comment to, you made that comment about growth in the U.S. of 3 or 4 percent. The growth this quarter on our processed meats was relatively modest. In understanding that number, our growth in the first couple of quarters was higher than that, but as you're in the fourth -- in the third quarter, many of our operations are running at capacity in order to meet our holiday schedule. So it's difficult without adding significant new capacity, which we are looking at some of those. That's one of the reasons that the third quarter, volume growth is not as significant because we're running at 100 percent and in fact running over 100 percent of capacity Saturdays and Sundays, and that's historically the way we run the plant in that period of the year.

But one thing that we have not discussed today that I think we should, we will be building new processing meat capacity this year, particularly on the sliced bacon side. And we're moving very, very aggressively and using up our hams and our bellies internally, and we're already putting in three new sliced bacon lines, we'll probably add another four or five sliced bacon lines this year, and we're going to process all of our bellies which means we'll have a 27 percent market share in sliced bacon within the next year and a half. And we will be increasing our ham production. But we're moving very, very aggressively to remove ourselves from the fresh meat commodity business to people that we compete against on processed meats.

Great. Thank you very much.

Jonathan Feeney.

Good morning, guys. First question, could you comment a little bit about the competitive landscape. Joe, you were just talking about a lot of the great progress you've made in value added. It seems like you have a couple of competitors moving in that direction. Is it a tougher competitive field than it's been in the past? And how do you think the consumer is responding to your -- both yours and the just added Farmland products?

I'll take this one. I'm sure Mr. Luter's going to have some comments as well. Did you ask the word value-added or did you ask the issue about precooked?

Both actually.

Mr. Luter made reference just a minute ago to the use of our hams and our bellies in our own operations. Our precooked business continues to grow very nicely. But that's a nice category growth for everybody in this business. So you are seeing our competitors announce that they've got nice increases in that category. The whole category is growing. An example of precooked ribs, whether that be in the retail case or that be in the deli case, that business is exploding for everybody. And the foodservice business in the precooked area grows. We've got an operation we bought a couple of years ago down in Texas, what we call our Quik-to-Fix operation. We've got some very, very significant volume increases in that end of the business. The area that we're seeing the modest, although still significant, is that precooked entree business which Hormel has a big presence and Tyson has a big presence and we've got presence. That's a competitive space there, and we're all three -- we all three believe that's a growth area, it is a growth area, but that is very competitive. Some of the other areas of the business, there's room for everybody in there.

Right now we think there's more opportunity on that type of item with foodservice than retail space just to get down to the bottom-line. We have not made as much progress on the retail side of it as say Hormel and Tyson because we haven't spent the marketing dollars that they have. But, the big part of our business has been on the foodservice side in regard to all of the precooked items.

And that's very small.

That's right. During the last 15 years, the big growth in processed meats has been in the foodservice side rather than the retail side, quite frankly. I think that's true for Smithfield, I think that's true just about everybody.

Excellent. Just a final question for Dan, actually just a detail question. You're going through the math on the economics of this bridge financing that should be coming off before March 15th. Is it fair to say that that financing rate is well north of your corporate average?

Well, it's variable-rate financing, Jonathan, so it is a little bit higher than the 6.5 percent that I mentioned, but it's probably only about 120 basis points above that. So it won't have a significant impact on our average -- overall average borrowing cost.

(indiscernible) Dan, the combination of our short-term rates and our long-term rates it probably is right in there, isn't it? It's right in there, about the Company average.

Okay. Thank you very much, guys.

We've got time for one last question, please.

Reza Sohabi (ph).

Good morning. Larry, on pork processing margins, do you think your selling prices can catch up with the raw material prices in the coming quarter or two?

I think it reacts much faster than that, Reza. You have problems when you're selling forward two weeks in terms of trying to keep ahead when the markets have been moving up in the third quarter very rapidly. So, I guess the net answer to that is yes.

Okay. And your comments suggest that your pork processing margins were probably better in the first half of this most recent quarter and then weakened in the second half of it? Have live hog prices surged up?

I don't remember saying that. If I did maybe it was a --. What I did tell you was the processing margins this third quarter are not as good as the processing margins the third quarter of last year because of the significant raw material increase. With that being said, I did tell you that I thought the margins were still very good.

Right. And of the entire increase in the operating profit of the pork processing business, is the vast majority of that from the Farmland business?

(multiple speakers) yes it is. If you look at increases it is yes.

What you're seeing now on the segment table the -- where is it, Dan?

The biggest piece of that increase would be (multiple speakers) Farmland.

I see. And then on the CAPEX front, Dan, what do you expect for CAPEX for the balance of this year and next year?

Dan, where are we running CAPEX relative to depreciation?

Just a little bit below depreciation, Reza. I really don't see any -- I think we have some additional capital commitments out there from what we reported at the end of last quarter, but I don't expect that our spending -- obviously a lot of it depends on timing, but I don't expect that our spending will be significantly different than this quarter, so you're probably looking at 40 to 45 million.

Got it. And then, Dan, you said debt levels decreased $100 million in the second quarter?

Yes. In the third quarter.

In the third quarter -- from the preceding quarter?

That's correct.

So they're about 1.8 billion, give or take?

No, we reported 2.1 -- 2.1 billion and it's just that 2 billion for the (multiple speakers).

Right. And then with all these acquisitions, would you mind helping us with some statistics like your slaughter volume in the third quarter and the hogs you marketed in the third quarter?

Reza, I'd rather not go to those numbers. I'm struggling with that because we don't disclose that kind of information in terms of -- but, we kill 27 million hogs a year so you can do your math on that.

And that's pro forma for Farmland? Right?

That is with Farmland. That is with Farmland. And we raised about 15 million hogs.

But net net net, if you exclude Farmland I think we killed a few more hogs this year in the third quarter than we did in third quarter last year, but it's not a significant number.

Excellent, that's what I was looking for. Thank you.

Thank you.

Joe Luter will have some closing remarks.

I think the closing remarks is I'm pretty satisfied with the third-quarter, we're expecting a good fourth quarter. I do expect '05 to be better than '04, but I'll repeat what I repeat -- I've always repeated that there are just so many external forces today, more than I've ever seen. There's more uncertainty out there in light of all the events that we all are very much aware of that it's -- it makes it even more difficult to exactly predict -- predict exactly what our earnings are going to be next year. But generally speaking, I feel very good about '05, and it should be a better year for us. I'll be surprised if it's not, but there's certainly no 100 percent certainty in these remarks, as I've said many times.

But, I do believe that we're really a holding company of many different operating companies, and with just a couple of exceptions we're operating very, very well. We still need to do a lot of work in Mexico; and Quik-to-Fix, we expect for that to turn to the black in the next month or two, but we're doing -- we expect big increases in Poland. That's been a big turnaround for us. Some increases in France. I think that we -- Farmland is operating better than I think anybody at Smithfield Foods imagined for the first three months that we have owned them.

We have been very happy with Farmland and I think that with the improvements that we can help Farmland. Farmland has showed us some areas that we weren't doing as well as we thought we were doing. So, I really am very optimistic about the positive impacts that Farmland is going to have. It's a major Company, as you know, with sales approaching 1.6 billion, and we were very aggressive in buying Farmland, but we did it because we believed in its synergies that would be created by bringing them into the Smithfield companies and it's working very, very well.

Morel worked very, very well some seven or eight years ago and this is working very well. I think the chemistry of the management of Farmland and Smithfield, in my opinion, could not be better, and I just don't see any of the normal glitches that usually go with an acquisition. I just don't think we're going to have them. I think the Farmland management team is happy with us and we're happy with them. We could not be more pleased with the acquisition.

And I think that pretty well winds it up. The big question is what are hog prices going to be in the next 12 months. If you'd asked me that six or seven months ago I would have missed it totally for the most recent quarter. The bottom answer is I don't know. But, I do know this, that we are the low-cost producer, and being the low-cost producer things will work out in the end regardless. So, that's what pushes us forward. Thank you very much.

Thanks everyone for your interest in Smithfield.