Smithfield Foods Inc (SFD) 2005 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Smithfield Foods fourth-quarter earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. (OPERATOR INSTRUCTIONS).

As a reminder, this conference is being recorded and available for replay through June 10th. You may access the AT&T Teleconference Replay System at anytime by dialing 1-800-475-6701 and entering the access code 783212. (Repeat.)

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

Good morning. Welcome to a call to discuss Smithfield Foods fiscal 2005 fourth-quarter and full year 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 2004.

With us today is Dan Stevens, Chief Financial Officer; Dick Poulson, Executive Vice President and Senior Adviser to the Chairman; Larry Pope, President and Chief Operating Officer; and Joe Luter, 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. It is again a pleasure to come before you today reporting very strong quarter-to-quarter comparisons with the prior year. And Smithfield Foods is very pleased this morning to report earnings of $85.4 million compared to 71.1 last year or $0.76 compared to $0.63 last year and for the year, 296 million. These are from continuing operation versus 162.7 and $2.64 versus $1.46.

A couple of notes in terms of the numbers, this year's fourth quarter does include a modest lawsuit settlement that does -- accounts for about $0.03 of the $0.67. And as well, last year's fourth quarter included, both some operating earnings and as well a gain on the sale of our Schneider subsidiary in the fourth quarter of last year, that accounted for $0.46 in last year's fourth quarter. So from our standpoint, it is $0.73 versus $0.63 and $2.64 versus $1.46.

It is a very good quarter for us. There's no question that live hog production continues to be an important part of the earnings stream for the Company, and it was an important part in the fourth quarter. But what makes me so pleased with the numbers is that we have said many times that our business has a number of prongs to our stool. And not all of those prongs or legs are strong at this point, and yet we are continuing to produce very strong earnings at the bottom line.

During the quarter, exports as we said in our release, exports continue to be very strong. The industry is benefiting from a strong export market. As well, Smithfield is benefiting from the exports, and we are benefiting more than the industry is benefiting. I think that in part because we've got operations on the ground in these foreign countries, particularly Eastern Europe. We've got strong contacts, as you know, in Japan -- very strong business in other parts of the Pacific Rim as well as Mexico and even Canada. All of that is helping us from a total business standpoint.

But the pressed meat processed part of the business was not good. And beef -- no surprise to anybody on this call continues to be very weak in an overall business standpoint and not contributing to the bottom line. So we are very pleased that our results are as strong as they are, given that some very significant parts of the business are not contributing in any kind of meaningful way to the overall results.

On the international side, where we are recording really very modest losses and for the year, not the numbers we would hope to -- that represents really just our processing side of the business. Our live production side on the international side, whether it be Mexico or Eastern Europe, are very strong. And they are part of the hog production results.

Another point that I would like to make is that in the other section of our segment reporting, that includes our turkey operations but not just our turkey operations. We are experiencing very nice increases in the turkey side of the business. And for the year-to-date numbers, that's reflected. However, for the quarter, you don't see much difference there. And the reason for that is that we've got some other offsetting -- particularly our bio diesel project that we've got going in Utah is at a very modest number, just really getting startup. But we've got the full overhead costs flowing through there in terms of the depreciation and interest that are now flowing through there without quite the volume to offset it. That continues from our side to be a very bright part of the future. But near-term, as we start this thing up and sort of get all the overhead and just a little bit of volume. And that is being reflected in the other segment in, both the quarter and the year-to-date.

I want to turn for a minute or two and talk about the processed meat side of the business, which the first 3 quarters was really a year-over-year comparison on for a 100 way basis, our margins were squeezed pretty tightly. We have seen some reversal on that in the fourth quarter. And our processed meats margins are turning around.

We still continue to have, not compared to historical levels but over the near-term historical -- near-term numbers, our commodity prices of the cuts are off. But we have been able to now successfully go through enough time that we've been able to pass through in our pricing an awful lot of that price increase of the commodities cost increase through the products. And so our process meats margins are returning to more normal levels. So process meats was really a bright spot in the quarter.

As well, I want to certainly talk about a bit about how I believe we have been talking for many, many quarters about how we believe our business continues to turn towards the enhanced products and the value-added products. And we highlighted several of those in our release this morning, whether it be the case-ready business on the fresh meat side or the precooked items in terms of ribs or cooked ham or precooked bacon. All of those numbers from our side are very, very strong and look to be strong going forward. We have been positioning ourselves -- the industry has as well -- toward these items -- the margins on these. The convenience that we're bringing to the consumers is being appreciated.

And I think that trend is going to continue, particularly as I look at our initiatives out there that we had announced a year ago to be a net buyer of bellies and hams. I can't tell you today in this conference call that we have made it. We have not. But I would tell you that we have made significant progress down that road. It certainly takes longer to get some of these things into distribution, particularly in the foodservice side. But I would tell you that I am very pleased with the results of our operating Companies in this initiative. I think they have a lot of irons in the fire.

As I look forward into fiscal 2006 in those product categories I just mentioned that use our raw material, whether that be hams or that be bellies, they've got several significant customer opportunities right before us -- that will be advancing and continue us down that road of -- other than those customers that we've got long-standing relationships with on some of those fresh items. We will be using this raw material internally for our needs. I continue to be very confident that we will reach those goals.

We have announced that we are building a new ham plant in North Carolina. That process is proceeding, and we anticipate having that open probably about this time next year. It will be state-of-the-art as well as we look at making over the next 2 years -- we anticipate making some nice enhancements to both our John Morrell operations and our Farmland operations. The North Carolina plant will come under our Smithfield Gwaltney banner.

And so I believe over the next 2 years, we as a Company are making the investments in our existing plant and our existing plants to drive costs out of our system to improve the product process, to improve the food safety aspects. Although, I'm not concerned about food safety today in any particular way. We just need to continue to focus on that, and we are. And we've got a couple $100 million of depreciation. And so we are investing that back into these plants to make sure that we are, both at the edge of technology and certainly at the edge of cost, knowing that we need to be competitive everyday out there in the marketplace. And I think we clearly are committed to that. I think we're clearly going to be a player for the future.

The other part of the business that we started a couple of years ago -- the deli business. We hired a gentleman from one of our competitors a couple years ago. Rick Goodman has come on board. And our deli business is continuing to be a bright spot for us, whether it's -- do not know that we're -- whether it is so much market share, as customers are coming to us. And we represent what I believe a flexible go-to-market style to them, where we can come as one company to them or we can come as individual operating companies to them. I think our customers truly appreciate the flexibility Smithfield can provide to them, both in the product breath and the way in which we can approach them, with the technical expertise that their particular product needs and their customer needs. I think our customers more and more, both on the retail side and the foodservice side, see us as important to their future.

You can tell the optimism in my voice this morning. It is strong. I won't talk -- I will come back to it after I turn this over to Dan Stevens for a couple of minutes and tell you what I see for fiscal 2006. But I am very proud of this organization and the job that we are doing, both in -- really all aspects of the business. Unfortunately, the dynamics, particularly in the beef side, simply don't allow for the profitability. But even given these adverse markets -- if you look at our segment reporting on the beef side -- they certainly aren't penalizing us but just a very modest amount, which is a tribute to how well these operating companies -- particularly at the beef level -- are running.

Dan, why don't I turn it to you, and you can give them some financial information and then I'll address looking forward.

All right. Thanks, Larry. Good morning everyone. Let me just take a couple of minutes, and I will -- Larry alluded to our change in segment reporting. Let me just cover that real quickly.

We did have a change in our segment reporting this quarter. Our international meat processing operations are now being reported in a separate segment. Before, as you know, they were reported as part of the other segment along with our turkey business. With our acquisitions in Poland and Romania and our increase investment in Campofrio, our international meat processing operations are again materially enough to be reported separately.

The other segment is now principally our turkey operations as well as some other minor investments. Those minor investments do include the biodiesel project that Larry referred to out in Utah, where we did incur some startup losses this quarter that partially offset some pretty good earnings in our turkey business. The pork, beef, and hog production segments remain the same.

If I take a look at the income statement, our sales for the quarter reached 2.9 billion compared to 2.5 billion in the fourth quarter of last year. About 250 million of that increase is from acquisitions, and 30 million is from foreign currency translation. All the rest comes from volume and pricing increases in our existing businesses. For the year, sales grew 2.1 billion, of which about 1.5 billion is from acquisitions, and 80 million comes from foreign currency translations.

Our selling, general and administrative expenses increased some $30 million in the quarter. About half of that is due to acquisitions, and the remainder is due to higher marketing and selling and variable compensation-related expenses.

For the year, SG&A increased some $86 million with over 79 of that increase coming from acquisitions. As well, we also had higher G&A expenses this year related to cost to comply with Sarbanes-Oxley. You also saw in the press release a fairly sizable increase in our corporate expenses year-to-year. About half of that increase is related to compensation-related expenses, including pensions and healthcare, and as well I mentioned, we did have higher cost related to Sarbanes-Oxley compliance.

Our interest expense was up some $4 million quarter-to-quarter and nearly $14 million for the year. Most of this is due to the increased borrowings to finance the acquisition activity that we had earlier in the year and to fund working capital investment, especially in our capital inventory. You probably also remember we capped the bond market for $600 million of fixed-rate financing earlier in the year to take advantage of a very good bond market this year. This had the effect of slightly increasing our overall average interest costs for the year.

As Larry mentioned, our earnings per share increased to $0.76 in the quarter, which included a $0.03 gain from the legal settlement this quarter compared to $0.63 from continuing operations on a fully diluted basis in last year's fourth quarter. For the year, earnings per share are $2.64 compared to $1.46 last year from continuing operations.

Our earnings before taxes, depreciation -- interest taxes, depreciation/amortization were 218 million this quarter compared to 189 million in last year's fourth quarter. And for the year, EBITDA was $780 million compared to 543 million last year.

Take a look at the balance sheet. Our capital expenditures for the quarter were right at 75 million compared to depreciation expense of just about 50 million. I think we have mentioned on previous calls that we expected our capital expenditures to start ramping up in the second half of the fiscal year with some of the larger projects that we approved earlier in the fiscal year. This quarter, we did see a fairly sizable increase in capital expenditures, and we expect that trend to continue into next fiscal year.

For the year, capital expenditures were 200 million compared to a depreciation/amortization expense of just about the same amount. And when we issue our balance sheet and our 10-K that we will file later this month, you will also see a fairly sizable increase in our investment working capital. A lot of this is driven from our replenishment of the feed lots that we purchased from ConAgra last fall. As you know, shortly after year-end, we did close on the capital feeding joint venture with County Group. And those cattle will be marketed over the next 6 to 7 months and generate some positive cash flow. This will also take the feed yard assets off the balance sheet except for the cattle inventory, which will remain for the first couple of quarters as we market those cattle.

Our borrowing levels stayed about the same as it was at the end of the third quarter, which is up about some $480 million from last year-end. Again, most of that increase is due to acquisitions that we did earlier in the year and as well, some increased working capital levels, as I mentioned. Our debt-to-total capitalization at year-end is right around 54%, which is up a little bit from last year-end but down from the second and third-quarter levels.

Finally, our liquidity is still very good with about $600 million of availability on our existing bank facilities. And as you saw in the press release, we did repurchase some shares -- a very modest repurchase at the end of the fourth quarter. And continuing into the first quarter of fiscal 2006, we have purchased another small amount in the month of May.

And with that, I will hand it back over to Larry.

Thanks, Dan. I'm sure that the questions of the day are going to be -- is the hog run over? We look at the futures market -- the guy had a nice year in hog production prices -- and is this over? We have reached the peak, and we are headed back down. I think we can read the futures market as well as you can.

Certainly, it has been a cooler spring as we have gone into, and the hogs have certainly been more available. I guess the point I would make is that it's probably -- I am not going to -- Mr. Luter might have his own opinions here, and I am sure Joe will certainly give his and his comments. We are not so big on predicting hog prices around here. But certainly, I do not know that it's going to be average $55 next year like it did this year.

The other side of that is that our raising cost, as we mentioned a couple of times, our raising costs have continued to come down for each quarter progressively and consecutively, as we have gone through this year. So I think we have our raising cost down from last year and well under control. So I think from the one-side of this, while you're looking at the live hog market, we are looking at the raising cost. And so I continue to be very optimistic that our live production side of the business will continue to be a very strong contributor to the bottom line. Maybe not to the extent it did this year but will continue to be very strong. The offset to that, which those of you who follow the industry know very well -- generally as the hog market comes down, the meat processing margins improve. This has been a very poor year on the fresh meat side of the business. So as those live hog prices decline, and if they do, I fully expect some of that to certainly come forward into the fresh meat results. And I fully expect the fresh meat results for this coming year to be better than the fresh meats results were for this past year. So I mentioned to you a couple of minutes ago, our processed meat margins have already -- in the fourth quarter have already come back up and returning to more normal levels.

The beef business, as I said, is not really making any contributions. So at this point, if the beef market turns -- and we have seen some blips and some positive weeks on the beef side. So there is a little bit of light there, not suggesting that it's -- that we are highly profitable on the beef side. But I don't think things are as bad as they were.

And the export business continues to be very strong. The other thing that we as a Company -- I am very pleased with the continuing migration towards these higher margin -- more highly processed products, both on the fresh and process side. I continue to see that being very strong for us.

And then finally, which I know Mr. Luter will focus on in his comments, our international side. We are both seeing the opportunities where executing against the near-term, which are exports today in our fresh meat and our process meats. But as well, we're continuing to build the foundation of this Company on the international side, not the export side -- in the international side and particularly Eastern Europe. We've said before a couple of times how enthusiastic and how bullish we are about the future of Eastern Europe for this Company, and I am. I will re-again tell you how bullish I am about that. I think it is the brightest spot in our future. Admittedly, the bottom-line impact of that in next quarter, the next 2 quarters and the next year -- are not going to be the big numbers you might hope for. But I assure you that it is a strong contribution in terms of the fundamental base of this business. And we are committed to that part of the world. And I think it is going to be an important part of Smithfield Foods' growth and sustainability. So we continue to go where the opportunities are, both domestically and internationally.

And I think we have built a very strong Company here. And we are executing against the near-term opportunities that we have. And we continue to build this business for the long-term. And I am extremely optimistic about where we are going.

That is most obviously demonstrated in the fact that we have, as Dan mentioned, we have been buying back the shares in the end of the fourth quarter. And as well, we've been buying into this quarter. And you saw in the release this morning that our Board just yesterday authorized an additional authorization of 2 million shares for management to take advantage of if the markets are not going to necessarily realize what we think the potential in the business and the stock is then. One of the places we can put our capital is to buy the stock back.

Not to say that we are out there aggressively buying -- we only bought 100,000 shares before the end of the year and a couple 100 after. But we believe in the long-term. We believe in the near-term. So we are prepared if those are not -- those that do not believe in the futures, we believe in the future. We will invest it either in acquisitions and growth there or in buying our own stock back.

With that being said, we'd love to have your questions, and Mr. Luter is on here as well. So we will be glad to take your questions. Jerry?

Operator, we'll open the floor to questions, please.

(OPERATOR INSTRUCTIONS). David Nelson, Credit Suisse First Boston.

Congratulations on a good year. I guess my first question please is on beef. You were a little negative in the quarter, but now you've got cattle feeding to go along with packing. Could you give at least a little qualitative assessment of how packing was relative to cattle feeding? Was cattle feeding up and beef packing down, which led to a fairly neutral quarter?

David, I guess I am going to say to you, if you look at the segment reporting the beef is showing -- I don't know if you mean a quarter-to-quarter or whether you mean the same quarter this year and last year. Because we are reporting about a $2 million loss.

Right. You have got a loss, but that is -- you're close to 0 -- is $2 million loss is not a big number plus or minus. Was cattle feeding meaningfully positive and beef packing meaningfully negative?

David, this is Dan. Yes, cattle feeding was positive on a -- it's kind of a relative term when you're talking about -2 million. It was positive, so it offset some of the losses that we had in beef packing. But in terms of quarter-to-quarter comparison, we had very little cattle feeding in last year's fourth quarter. So the fourth-quarter results this year were positive but compared to a very, very small number in last year's fourth quarter.

To be more specific, David, cattle feeding profit for the quarter was $2.9 million.

Thank you, Joe. You noted in the year release that case-ready volume -- case-ready pork volume up 32%. I guess you're not doing -- I guess that implies maybe you're not doing a lot of beef. I guess could you expand on where that business is coming from and where you think it might go? Because you tried case ready before and had some fits and starts. Is something clicking now?

David, I do not like to go, and I won't agree to go to specific customers. And you know that. And I do not think anybody else wants to do that. Most of our competitors know that we have picked up at least one very large customer on the case-ready business. And it is pork; it is not the beef. It is pork. And that business -- provided it works for them -- that looks to be a very significant piece of case-ready improvement. And incidentally, we are not out of the case-ready business in any way. We've got a sizable -- I know that we have not been reporting big increases in case-ready quarter-over-quarter because quite frankly we haven't a lot of new customers. That was a big pop 3 to years ago.

That business stabilized, and it has now -- we secured another very sizable customer. And it is helping our overall sales in the case-ready business. And I think provided that works for them, that business is going to continue to be there. They are on the program.

Now your question is -- do I think it's going to continue and migrate towards other customers? I don't know that I -- if this is a sudden trend change -- I do not know that is the case. We continue to be out there trying to convince customers that this is the right alternative for them. And that takes time. And we are talking to other customers. But today, it's really one big customer.

If I could ask one last one please. You've talked in the past about going from being a sizable net seller of uncured bellies to being a net buyer. Could you update us on your progress there? Where you might expect to being to be a net buyer -- a net buyer of belles please?

I would tell you David that I made this statement about this time last year. I'm not sure if I made it publicly to interested parties, but I certainly made it internally that I thought I would be there today. I cannot make that statement today. We are not there. We have made giant progress along that road, and I want to say to you today that I think we will be there next year this time.

Great. Thank you very much.

David? Larry, correct me if I am wrong, but we have five additional microwave ovens that will be -- being put in the next 6 months.

That is correct, Joe.

And in fact, if you read the press release, you will -- if you read the release this morning, you will see that we indicated that we have grown -- we have put some more capacity in place already this year. And as Joe just alluded, we have as well a substantial -- additional -- the precooked bacon business just continues to be just extraordinarily good. I want to tell you that. So we have got 5 -- we have 13 pre-cooked microwave lines in place today, and we have 5 more on order as we speak that will be in place -- will fully be in place before the end of the calendar year.

And you have those 18 ovens in -- about what percentage of that would be of your total production?

David, I have not done that math. I'd have to think through that math. I don't know if you know though in pre-cooked bacon, you get about a less than 30% yield. If you call me off-line, I will go through that calculation and give it to you.

Christine McCracken, FTN Midwest.

Larry, we have been seeing pork inventories building here for a few months. And it seems like the value of that pork or at least domestic demand has been a little soft. And we're trying to figure out -- what is driving that? And part of it we think might be the cold weather that we been having and some of that delays that we're seeing in the grilling season. Are you seeing that? Is that one potential kind of factor in that? Do you think domestic demand is just soft overall?

I think what you've gone -- Christine, I can only speak from our side. I cannot speak for everyone else. From our side, what we've got is export business that we cannot get to the export markets. As you know, the exports have been very, very strong. And as a result of that, the transportation and shipping issues as well as the other side, receiving cold storage and distribution, it has been complicated because we are overtaxing the system. And so you have had products sitting in cold storage and some -- many cases we were already sold -- waiting for a ship or waiting for the transportation to get there. And all of those increases from our side are already sold. The product is already destined and already been priced. It is just a question of trying to get it through the distribution system.

That explains the building in inventories. But can you talk about the values here domestically? Why are we seeing basically soft demand here in the U.S.?

Christine, this is Joe Luter. Quite frankly, we don't see soft demand domestically. As Larry said, all the buildup in inventories at Smithfield Foods is product that has already been sold, waiting to be shipped. And there's just been a shortage of containers and a shortage of reefer ships. We have seen some dramatic easing into that in the last 2 or 3 weeks. Shipping rates are coming down. Ships are becoming available, and we expect that problem to pretty much go away in the next 2 to 3 months. But we do not have burdens of inventories of fresh meat because of weak domestic demand. I cannot speak what other people's inventories are, but I can tell you that we don't have any product in the freezer that we feel is burdensome whatsoever.

So in terms of domestic pricing, why aren't we seeing a little bit more strength here in--?

Well I think you see in domestic price, you seen strength in every category but one. And that is in bellies. Bellies are dramatically cheaper than they were a year ago. And as you know, they got very historic highs this time last year. And a lot of the retailers anticipating that quite frankly haven't been actively featuring bacon. But now you have green bellies prices that are very, very attractively priced. But because most retailers work 5 weeks out, you're not seeing a lot of bacon features right now.

But I think that you will see them in the summertime. I expect to see sliced bacon become very strong as we get into the summertime. It's just a factor out of no one wanted to lock in real high-priced bacon features because of what happened last year. But, and you correct me Larry if I'm wrong -- I am not as close to day-to-day as I used to be -- but most of the other cuts are not weak compared to the same period last year. Would you agree with that, Larry?

I would. And in fact, Joe, I would tell you that there's even been some -- your comments about the retailers will be featuring bacon -- you are right. These retailers, Christine, are setting their ad programs further and further out it seems. I don't know if that is going to reverse. But we are seeing activity even this week -- sharply higher interest in bacon features for the July period. So Joe is absolutely dead-on correct there. This thing -- we do have a short-term blip here, but retailers have already acknowledged it and are already reacting to it.

That sounds good. You talked, Larry, about lower raising costs. I assume you're talking about the lower commodity prices that we have seen. I know you do not discuss your particular hedging strategy. But can you talk a little bit about your outlook for the coming year in terms of grain?

In terms of--?

Grain prices.

Okay. I know what you said. I think we're going to have -- I think this grain markets have come down. I think these grain markets at least for the near-term what the futures look like and how are able to -- as you well know Christine, we routinely take further acquisitions on our grain positions. And so I think we're -- I think our raising costs -- the way I would answer your question is that I think our raising costs are going to be well under control as we go into fiscal 2006. And so I do not think that we are going to be sitting here surprising you next year in terms of where our raising costs have gone. Does that answer your question?

An order of magnitude? Do you think you're going to be under what -- $38, $37?

I don't know that we are going to get there, Christine. We are under 40 today, that I am not going to tell you I am going to get to $37.

Pen Jones, Deutsche Bank.

You mentioned in the release this morning that U.S. breeding herd is expected to remain steady. Is it fair then to assume you're seeing very little signs of hog production expansion and are comfortable with the USDA estimates for hog and pork supplies of flat to up 1% or so over the next 12 to 15 months?

Joe, do you want to take that or me?

Go ahead take it, Larry.

I guess the short-term answer is that I don't know that our intelligence is all that much better than anybody else's. Sure, we know a lot of people. We do not hear lots of expansion, and we don't see it. It is certainly -- we have had a strong hog market now for a long time. The natural tendency at this point would be to hold back some of your sow. And I know some of you have looked at some of these sow slaughters and see that -- how the sow slaughter this year is down from last year. But compared to the year before last and compared to the 5 years, it's really not.

So I mean that there's certainly the natural tendency here would be to hold back some of these sows. I think I continue to believe that we are not going to see a lot of expansion. But I think that there will be a few more back. The financing issues, the legal issues, the environmental issues are just in terms of getting new farms permitted and such is extremely difficult and impossible in some states.

So no, I do not think we're going to see much sow expansion here. At least that what's we see. Again, we could be wrong. You know, we do not have the best intelligence in the world out there.

But you're not seeing an onerous supply of hogs and pork looming in the next 12 to 15 months?

That's correct.

And I guess just a quick follow-up on Christine's question. You mentioned that raising costs were down due in part to lower feed costs as well as improved efficiencies. Can you give an order of magnitude as to the contribution from each? Was it largely feed cost being down or efficiencies improving significantly?

No question again that the grain costs are our largest ingredient -- our largest component of cost. In so that the raising costs are going to be most influenced by -- unless you have really a big outbreak of a disease problem or something -- the short answer is -- grain costs are the majority, not efficiencies.

Finally, one last one if I may. You talked about the benefits of vertical integration and how your strong results in live hog production helped offset some pressure in pork processing this quarter. I was wondering, assuming normalized feed costs, is there an ideal live hog price that enables you to optimize your profits in hog production and pork processing at the same time?

You cannot say an optimal -- we have had this debate internally now for lots of time about that issue. You're not the first person to ask that question. It is not live hog prices; it is meat prices. And so it's a point at which the meat moves, and we can get reasonable margins on that. So it is very heavily dependent upon where the meat markets are. So the short answer to that is -- no, there is not a hog price that from our standpoint, from Smithfield Foods' standpoint, we have said that we like higher live hog prices.

And I want to go back for 1 second -- so I hope I answered that question -- it's really more commodity meat prices than it is live hog prices. I want to fundamentally say that.

One of the things I want to say folks so that you understand a little bit of a change in direction of the Company in the last 6, 9 months here. We are beginning to act an awful lot more like an integrated processor. And so you're seeing some of the margins on the hog production side that could routinely have been on the pork processing -- we're taking into consideration the impact on our hog operations of our slaughter levels and our processing levels at the plants. And I think the combination of the two is very positive. But you could have movements between the two segments that may be disproportionate because we're looking at the combined and saying -- if we process more, we process less.

In this year, we have processed more animals even in an adverse fresh pork market. But we were able to move the meat. We had the export markets out there. We had some market opportunities with customers. So even if it wasn't profitable on the fresh meat side, it was still profitable on the hog production side. And we process those animals, put more money in the bank and built us a stronger base and built a stronger relationship with our customers, even though it wasn't profitable on the processing side of the business.

So I know that many people say, well, Smithfield's profits are all tied to the hog price and the hog production side of the business. In this case, part of that was strategic in terms of how we made decisions to run this business. And it is one of the reasons these results are what they are. Because we thought about it on an integrated basis, not just as a hog production and not just on meat processing. It's -- how does the total add up? And I think we made some smarter decisions, and they are reflected in the bottom line this year.

John McMillan, Prudential.

Congratulations on a great year. Can you just give us some numbers -- you gave us the 55 number for the average hog price for the year. Can you just give it for the quarter and also production costs?

I think the bias down, I don't think ours were 51. Does that sound right? 51 for the quarter, John. And I said our raising costs for the quarter are under $40. I will tell you they are between 39 and $40.

And for the year?

For the year, I think we were about between 40 and 41. Is that not--?

41.50.

41.50.

Joe, you have been -- over the years, you have been kind enough to talk about the broader industry environment -- your competitors. I look at this buyback program, and I feel that it's nice but I kind of feel like what you really like to do is kind of buy your competitors. You are watching one of your Company's -- one of year competitor's, Premium Standard Farms, go public now. Another one, Swift, has a new CEO that might signal something. Can you just talk about how these competitors' moves influence Smithfield? If they do it all?

No, I cannot say about Premium Standard, first of all, by making the decision to do an IPO. I don't think that is going to have any impact upon us whatsoever. They are a vertically integrated company. As you know, we believe in vertical integration. They do not have the process meat business that we have. We are going to be following it very, very closely to see what the pricing is. But Smithfield is a different company from Premium Standard in that we have a very, very large substantial process meat business that they do not have.

In regard to Swift, as you know, it is owned by Hicks, Muse. There's an awful lot of debt on the company. They are financial players. And they normally hold a position 2, 3 years, sometimes 4 if they have to. But Swift will be sold in my judgment to somebody in the next year or 2. We have not made any secret of the fact that we would want a seat at the table when that process gets active. I don't know if I want to go beyond that, John, unless you have a specific--?

No, I appreciate. Just in terms of hedges, it seems to me that you are kind of going into this year without much hedging in either corn or hog prices. I know you are reluctant to talk exactly what your hedges are, but is that a good thing to model in?

I know it's something of strong interest to the investment community. But we do have a pretty good strong corn and soybean position. We do this almost every year. So that we know what our feed costs are going to be. We expect to be profitable in that area in the next 2 or 3 months because as you know with the recent run up of soybeans and corn, the levels that -- those levels today are higher than the levels 4, 5, 6 months ago. So that is going to help us going forward. We do have that feed costs pretty well locked in for the rest of the season. And we do feel that hog prices are -- on the futures markets -- I may be totally wrong, but they look awful cheap to us.

As Larry said, export demand is excellent. We are shipping a lot of product into a lot of countries that we have never shipped to before, particularly in Eastern Europe and Australia. We are very, very optimistic going into next year, despite the fact that there is a possibility that our hog growing profits won't be as great. But keep in mind, we left I think the number ended up around $80 million on the table the past year because we didn't anticipate the strength that the hog market enjoyed this past year. So I can tell you that we don't have that vulnerability or weakness.

It is just if you -- if you just look at the third quarter to the fourth quarter as hog prices came down and your level of sequential earnings came down some $0.14. If you do look at hog futures and start modeling some kind of 45 number to hog futures, it's really hard to get a year of up earnings, even if beef comes back a little bit. I know you do not give guidance. And I fully understand, Joe, why you do not give guidance. Do you think there's a better than 50% chance you have up earnings this year?

Yes, I do. As I mentioned earlier, I don't think hog prices are going to be as cheap as what the futures markets are indicating. That is not to say I am right, but that is just my belief at this particular point in time. We expect dramatic increases in our profitability on the meat processing side this year. We always suffer -- all of our competitors are suffered on process meats. Anytime you have a big run-up in the fresh meat side, your process meat business suffers regardless. So we expect big substantial increases on fresh meat processing and on processed meats.

In the cattle area, we expect substantial improvement over last year. And this may surprise you, but there's a possibility that the hog production unit next year will be pretty close to what it is this year. But on the future markets -- don't indicate it at this time. If you look at the wide swings in the futures market, that does not mean very much -- certainly not to me.

Diane Geissler, Merrill Lynch.

Just a quick question, I missed at the beginning the impact of the acquisitions on the revenue in the quarter? Could you just repeat that for me please?

Diane, this is Dan Stevens. In the quarter, I think I mentioned -- I can double check my notes -- but it is 250 of the $400 million increase.

And F-ex with 20 million, 30 million?

30 million.

Jonathan Feeney, Wachovia.

Congratulations. As a follow-up -- you talked about, Larry, it may be some lack of featuring through retail due to high belly prices last year -- any kind of a lag reaction that is maybe explaining a little bit of this soft demand environment in the U.S. Our contacts in the foodservice world seem to feel pretty good about themselves right now that pork pricing is kind of coming down in a more secular way. The mood I guess couldn't be more of the opposite that it was this time last year about the time of the national restaurant, Joe. Can you comment on the foodservice sales and how those are tracking relative to retail, particularly in pork?

They are completely different. As you obviously know, that is a completely different buying group and a completely different buying mentality, Jonathan. Those people are setting menus. In the foodservice side, we haven't seen any fall off at all. In fact, we're seeing -- we've got some foodservice things that are quite strong in front of us. And the commodity pricing does not have -- you don't really feature bacon as such. I realize some of these hamburger chains do go through a featuring program. But the day in/day out business is running as opposed to where we see the real impact of the market is on the retail side.

So I think on the foodservice side, that's really where are growth in the pre-cook bacon has really seen the continuing upward trend there and is the lion's share of why we have got 5 bacon lines on order. And we just put our -- said we have got 13 lines today. We only had 12 lines 30 days ago. We brought on another line even in the last 30 days, which we are running pre-cooked bacon operations 6 and 7 days a week because we simply cannot meet demand. And we are -- we're almost -- I guess I will say -- won't say -- we are almost turning down orders. The fact of the matter is we are turning down orders. But we are addressing that very quickly.

So I think you were making the same point I am -- is that this commodity price is not tied to the foodservice business. It is tied to the retail business.

Right. I think to put it very, very simply -- the retailers haven't featured bacon very strongly in the last 4 or 5 weeks because of what happened last year. But with the significant drop in fresh belly prices, you are going to see this feature activity be -- in my opinion -- very strong as we move into midsummer.

Thanks, Joe. And just one other question for you guys. We've actually been hearing in small pockets about a little bit of expansion on the production side. You guys know more than I do, so I trust you. But I guess what I would ask is -- you mentioned permitting, Larry, and I think that is mainly a North Carolina issue. But correct me if I'm wrong, what is it that is holding you back from adding to -- leaning into what seemed still a pretty profitable environment -- and adding some production here? And to the extent that you can, what do you think is holding back the industry outside of North Carolina to adding production in what has been a great environment for some time?

Larry, let me answer the question.

I was going to tell you to answer that one, Joe.

I just tell you point-blank, we think the industry is a lot more intelligent than it has been in the past. We are not going to expand. We think that is the worst thing in the world that can happen in the industry. We have not put in additional sows in the last two years and have no intention of doing it. There may be some small increases this year. But we feel like that if you put in any substantial number of sows, you will -- no question -- you will dramatically reduce hog prices. If someone goes out and puts in -- I say someone -- if you have a 6 or 7% production increase, it will of course have a dramatic impact upon the price. That is just the nature of the business. Then, the weaker people are weeded out, and this cycle starts all over again.

We do not expect any big increases. But there might be some slight increases. But with population growth and with continuing expansion in the export market, we're not concerned about it at this point. We think pork is very competitively priced with poultry and beef at this time.

That's interesting. If industry discipline has improved that much, Joe, why would not you more -- you talk a lot about Swift and I think rightfully so. But why wouldn't you think more about continuing to consolidate those hog producers. Clearly, Smithfield had a ton to do with the more intelligent behavior of the industry. Why not kind of accelerate that right now?

Well, there are not any opportunities out there right now. We did buy some sizable operations in Colorado and in Texas/Oklahoma area 1.5 years, 2 years ago when hog prices were very, very cheap. And that has rewarded us very well. So we take advantage of opportunities as they present themselves. But because of the profitability of this industry right now, it's probably not the best time to expand. I have always said there's more opportunity in bad times than there are in good times in this industry. In my opinion, if you bought today, you are buying at the top of the market. And that would be a mistake.

Pablo Zuanic, J.P. Morgan.

Just show me your math here Larry in terms of -- a lower pricing of hogs for a $1 doesn't necessarily translate of course into a $1 benefit for the pork processing business. Just to expand on how that math works -- because what I'm looking at is -- for example, $480 million in profits in hog production compared to 125 in '04, that's a 350 million jump there great. But in pork processing, the number was only $50 million higher in 2004. I am just trying to reconcile these numbers. And the reason I say this, if you are going to comment, your hog production margins were 8.7% in '04. And pork processing was only 3.6%. I'm just trying to get a sense that yes, hog prices will remain high for a while but eventually they come down.

How much benefit can you really get in pork processing? And do you see any structural changes on the bacon and meat industry? You know, with Oscar Mayer bringing prices down, private label growing -- any difficulties there? If you are going to expand on that math and how that works strategically please?

I guess Pablo that's a very difficult -- we knew the answer to that question, I guess we could all get rich fast. There is not a perfect relationship between the change in live hog prices and the meat processing business. That relationship is not perfect by any stretch of the imagination. But we do know that as hog prices come down, routinely the meat processing side of the business -- the fresh pork side of the business improved and as well the process meat side of the business generally improves because the value of the raw material is cheaper.

So is that going to be one for one? If live hog prices are in fact lower, is that going to be one for one this year? I do not the answer to that question. But I assure you that if the profits in the hog production go down, I feel very comfortable that that drop in profitability in hog raising will not translate all the way to the bottom line. A good portion of that will go up into the meat processing.

The other side, I know you made the point about other people in the industry and they being competitively priced. Remember, I told you, I am extremely optimistic about not only the fact that we are increasing our market share in the bacon and ham categories and we are putting in capacity to take fresh product, which make minimal margins on and convert that into process meats. So we are going to get the benefit of that. And secondarily, there is that continued migration towards the value-added, fully-cooked product. If you look at the numbers we indicated in the press release, those things are very solidly more than double digits in many cases. And those have very, very nice margins to us. They are very reasonable buys for the retailers and the foodservice and the deli business. So that is going to be another addition to this year and as well dependent upon how the export markets continue to support us.

So I know your question is, Larry is -- if in fact the hog production goes down, how much of that is going to go to bottom line? It is not going to be picked up in meat processing. I wish I knew the answer to that question. That depends on how well the markets cooperate on the meat side and how well we execute on these other product categories. But I can tell you that everything that we lose on the hog production side will not impact the bottom line to the extent of the loss in hog production profits. I will tell you that.

And just a couple of follow-up -- most of the equations, I need one for John. Just trying to understand the initiative to expanding these -- is that because you are recognizing that you have too much volatility in the business by being so focused in pork? Or is that you see beef as a great opportunity? If you can just help us think through the -- why beef would be so interesting to you? And then with a greenfield operation, could make sense or does it have to be through acquisitions?

Well, we strongly believe in a vertical integration concept and where it is -- beef vertical integration is different to some degree from pork. Fundamentally, there is no difference. We now have a captive supply of cattle. And if you can set a plant that is very, very close to that captive supply, I think you will have cost advantages over a substantial part of the beef industry. And here again, as I have said earlier, as you know, the beef earnings are very, very weak -- nonexistent today.

And we think that perhaps there will be some opportunities on the beef side of the business. If you are going to get into beef, you do it on a down cycle and not when things are going very, very well. But we think the beef industry is going to return to profitability. And normally when things are bad for a long time, be it in poultry or beef or pork, when it turns, it generally gets as good as it was bad. 1, 2, 3 years ago. We think that the beef industry is going to return to profitability. And in all likelihood, probably to higher levels than it has seen in the past. That's what history teaches you in this industry.

In terms of packing capacity, you will be ruling out greenfield operations? It would have to be an acquisition?

Well, we don't know which way we are going to go. In the right location, we are looking at a greenfield site. But we are also looking at possible acquisitions. I cannot tell you today precisely which way we are going. And even if I knew, I would not disclose it at this particular point in time.

Just one last question for Larry. You explained that in a year's time, you will be able to be a net buyer of loins and bellies. But just elaborate in terms of what happened. You had made a promise at last year. You mentioned some issues in terms of getting space on the counted, on the bellies. If you can just explain what has been the problem there? Is it competitive pressures, retailer push back? What is the issue?

Pablo, the issue is the complexity of the business. These organizations are so large that going through the specifications review and the distribution solution, you have to have a full solution for the retailer or foodservice. It takes a long time -- it seems to take even longer. The process seems to have slowed down. From the point in time that someone is interested in the new slotting, in new distributions, the point that you actually get the distribution -- has just become elongated. It's not that retailers are not as interested as they were, particularly the foodservice. I made reference to that.

Just getting through the menu management people and getting through the R&D people and getting through the service system and getting into their warehouses and through their distribution system and back out -- where it used to seemingly take weeks and months, it now takes seasons and can be 12 months and 8 or 9 months before you can truly get your product approved in spite of the fact that they start off already knowing that you are 95% of (technical difficulty). There is a small flavor profile change (technical difficulty) that have to go through testing. And that is just taking a lot longer. It has become a lot more bureaucratic in terms of just the approval process. Unfortunately, it just doesn't happen. Even though you are assured the business is coming, it just doesn't happen as fast as it used to.

Just one last one, if I may, for Joe. I think last year at a conference, you said that the European business could be as the big as the U.S. business in terms of profit by 2012. Do you still stand by that comment?

I do. I was in Eastern Europe, let's see about 10 days ago. And I am very, very excited about Eastern Europe, particularly Romania. In my opinion, Romania is the Iowa of Europe. And Romanian is a net importer of meat, rather than a net exporter of meat as it should be. And we have bought a very, very large plant there, and we are putting in farms there are as quickly as we can get permits. And we see a tremendous opportunity in Eastern Europe. To make a comparison that would make it pretty understandable to people that don't follow the industry every minute of every day, it would be like Iowa today importing meat from California or from New York to Iowa -- which would make no sense whatsoever.

And that is quite frankly the situation that we see in Eastern Europe. And we think that the industry was located in the wrong part of Europe, as a result of when the Iron Curtain went down in 1945. And the industry was put in the wrong part of Europe. And we are not burdened with plants in what we believe is the wrong part of Europe. We are expanding into part of Europe, where it should have been in the first place if there had not been an artificial barrier.

You don't expect political problems in Romania, you had in Poland in terms of other farmers?

I think anytime you represent change, there is some opposition. But no, we see less problems in Romania because quite frankly you don't have a developed hog industry in Romania as you did in Poland. So you don't have that constituency in Romania that is frightened of efficiencies, if you will and at lower cost. So no, we still have bureaucracies to contend with. Things move a little bit slower in that part of that world than they do in more developed parts of the world. But all I can tell you is we are getting there, and we are very, very optimistic that that is going to be a very substantial part of our profitability.

Is it going to enhance our profitability by any large amount for the next year or two? The answer is no. But that is not how we built Smithfield Foods. We do not run the Company quarter-to-quarter or even year-to-year. We take long-term positions that we know will work, such as when we went into vertical integration some 15 years ago. It did not hit the bottom line for 4, 5 years. But you see what it has done for us long-term. And we see the same opportunity in Eastern Europe today. We're very, very excited about it. And it is going to contribute a tremendous amount to our profitability a few years out, even though it will have slight losses in the meantime. But that's the way we run the Company. And that in my opinion is why we have been as successful as we have been.

Operator, we will take one last question please.

Andrew Wolf, BB&T Capital Markets.

Could you comment on your sales mix and hopefully your profit mix as well between processed and fresh in the pork segment?

Andy, we don't report either sales or profits between fresh and processed meats. We routinely change what we call the transfer values between the fresh pork side of the business and the processed meat side. We are concerned if we begin reporting that to you that we could be criticized by "managing the numbers" because of the way we transfer off of our cut into processed meats. And we routinely change those based upon what we think the opportunities are in the market. So you could see distortions just because of strategies we would have that would not be necessarily comparative. So we have always resisted the urge to break down the fresh meat from the processed meats because it gets a little bit arbitrary in terms of how we transfer that product.

How about on the sales side? Could you give us a sense of directionally how that mix or -- what was it up year-over-year? Anything just to give us a sense how your profitability -- that is one of the linchpins of your profitability at a division?

Dan, do you wan to answer that, or do you want--?

Andy, I think and in presentations we have made in the past with the investment community, you have seen that we -- on a dollar sales basis -- we kind of cross the threshold in terms of -- we are now more processed meats than we are fresh meats. And I would tell you that I expect that that trend will continue when we get to final breakdown of sales between fresh and processed. It would be greater processed meat sales this year than fresh meat sales.

The other thing I would to tell you, Andy, in terms of profitability -- the way we account for internally ourselves -- I made the comment early in the call that our process meats business has turned in the fourth quarter, where we were seeing quarter-to-quarter adverse comparisons on processed meats for the fourth quarter. I saw quarter-to-quarter, which means this fourth quarter compared to last fourth quarter, our processed meat margins were positive. And conversely that our fresh meat has been depressed now for several quarters and as well was not strong in the fourth quarter as well. The fresh meat profitability is not improved. The processed meats profitability has improved.

One other follow-up, then a question for Joe. Larry, your comment to cold weather -- I assume that's why you think the total hog slaughter was up for the industry during the period. And you think that might have caused a bit of excess supply in the quarter?

I think it has been favorable. I think it has been favorable raising conditions is the way I would say that, Andy.

But the numbers we track showed total slaughter, even though the sow side slaughter was down, total slaughter was up over a percent for the quarter, which is --

Andy, this is Joe Luter. The weights are down a couple pounds per hog. These farmers had been advanced marketing pigs this year a little bit stronger than last year. So you have to look at the average weights along with the numbers. Most people don't do that. But the weights are I think the weights are down 1.5 pounds, 2 pounds per animal compared to last year.

And my last question is for Joe. It seems to me at least that a lot of the linchpin to your -- assertion if you will, pure optimism for fiscal '06 that it could be a good year and probably an up year. Is it the export markets remain strong for pork? First of all, do you agree with that? Or to what extent do you agree with that? And second of all, could you just add some color on that so that we could understand your thinking there?

Well first of all, let me say as you know, I don't predict quarter-to-quarter, and I certainly do not predict year-to-year. I can tell you that I do not see the weakness out there next year, as some people see. On the export side, I do expect it to be strong. We expect to put more product into Eastern Europe than we did last year. We think there could be some improvement in Japan. Australia, there is a current problem right now that needs to be resolved. But that business has seen some dramatic increases. And we expect it to continue.

And we think there's a slow trend; although, there could be bumps in the road -- there's a slow trend more and more open free trade of meat products in the world. And the big question mark out there is China. There's literally tens of millions of people are moving into the cities in China. It is going to have a dramatic impact upon demand for meat we believe in the foreseeable future. China we believe is pretty well tapped out in regard to its capability of producing more meat because there is just not enough feed grains available in China. What will happen there, we are not sure. But we think the trend is going to be positive for the next 5 years in China and quite frankly in other parts of the world as trade liberalization -- slow as it may be -- continues to improve supply, despite there are still bumps in the road.

Joe, would you like to make some closing remarks this morning?

No, I think I have pretty well covered it Jerry. We've had a good year, and we are looking forward to another good year. And I know people like to talk hog prices, hog prices, hog prices. I like to talk vertical integration, vertical integration, vertical integration. And I continue to believe that we are nimble and flexible enough that because we are vertically integrated to a great degree, it gives us some capabilities to produce superior results, not just this year but in the future going ahead. And that's been the case in the poultry side. And I think that is the case in the pork side, and that's why I think you have seen Smithfield outperform on its competitors is because of the vertical integration strategy that we put in 15 years ago.

This is old suit, but I think that is the fundamental issue. And that is why we continue to be excited, and we're taking that model. And we are moving it to Eastern Europe, and we are very enthusiastic about the future. I am 65 years old. If I wasn't enthusiastic about the future, I be sitting on my boat right now. So anyway, that is it. I continue to be optimistic. And next year, right now, things look good.

Thank you Joe, and thanks everyone for joining us today.

And thank you very much ladies and gentlemen. This does conclude your conference for today. Thank you for your participation and for using the AT&T Executive Teleconference Service. You may now disconnect.