Smithfield Foods Inc (SFD) 2005 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Smithfield Foods third-quarter conference call. (Operator Instructions). As a reminder, this conference is being recorded. It will also be available on replay after 12:30 PM today, running through March 8 till midnight. You may access the AT&T Replay System at any time by dialing 1-800-475-6701 and enter the access code of 820103.

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

Good morning. Welcome to a conference call to discuss Smithfield Foods fiscal year 2006 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 2005.

With us today are Dan Stevens, Chief Financial Officer; Richard Poulson, Executive Vice President and Senior Advisor to the Chairman; C. Larry Pope, President and Chief Operating Officer; Joseph W. Luter III, Chairman and Chief Executive Officer. This is Jerry Hostetter, Head of Investor Relations.

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

Thank you very much, Jerry. I'm pleased this morning to report net income for the 13 weeks ended January 29 of $71 million compared with 97.5 in the third quarter of last fiscal year; that's $0.63 compared with $0.87. For the year to date, it's 171.6 compared with 210.8 or $1.53 compared with $1.88.

I remind you in our second quarter, we indicated that we had some charges in both the current year and in the prior year related to a restructuring charge that amounted to $0.09 in the second quarter. So, it's affecting the $1.53. In the prior year, the closing of our beef operation -- Showcase operation in Philadelphia -- negatively impacted last year's earnings by $0.05. So you should consider that in the year-to-date numbers. There are no special charges in the current third quarter.

I think this quarter's results is all about the execution of an integrated model. We at Smithfield have been talking for some time now about the fact that we are running this business with a combined organization and the combined operations. We are extremely pleased with our fresh pork and processed meats margins in this third quarter, as they were up very sharply. And I would tell you those earnings occurred on both sides of the business, both fresh pork and processed meats. Our integrated model that we think we have put together in the way we are running this business everyday demonstrates this in spades in this quarter. Yes, our hog production profits are down, but our meat processing margins are up. The third quarter is generally a good quarter, and it was a very, very good quarter for us. We believe that we are considering that everyday in the business. We are not running them as separate businesses. We believe that the fact that our numbers are somewhat different than some of the others that have been posted of late, we believe is the fact that we are executing this business everyday differently than our competitors.

Our beef numbers, while nothing that we are at all pleased about and certainly not where we wish they were, we're not reporting losses -- operating losses in our beef division either.

On the international side, our earnings are down. We have mentioned a couple of times that we are having a tough year in terms of pricing pressures in Europe. We are not seeing the results out of our international operations that we would hope. But we are focused very heavily on that end of the business.

From an overall standpoint, I could not be more pleased with the way in which we have gone to market and the way in which we have run this business in what most of us in the industry would consider a very tough environment. The part that is the most pleasing for us on the meat processing side is the continued strong emphasis we have in continuing to advance our value-added processed meats. We indicated in the press release that we have added 40% capacity in our precooked bacon operations, while our precooked bacon volumes are only up 9%. The reason for that is that all of that capacity -- a good portion of capacity just came online at the very end of January. I'm telling you that capacity is in place today, and we are utilizing that capacity as we speak. So, that part of the business is strong.

We had a very good holiday season. Our spiral ham business was very good, and all of our holiday ham business was very strong. We continue to see very, very strong advances in the precooked categories of this business from precooked ribs to precooked sausage, for the dry sausage business. Those value-added precooked bacon categories -- all of those, we have strong emphasis, we have made capital investments in that end of the business that have been going in for some time now. We continue to report I believe quarter after quarter after quarter double-digit increases in those categories.

I believe we are in the right place. I believe we're going to market correctly. I think we are focused in that end of the business, and I believe that our customers appreciate us in that end of the business. We are bringing them value products. And I believe they are working for us, and I believe they are working for our customers. So, from my standpoint, from an operating standpoint, I think given the adverse environment that this business is -- most everyone in this industry is talking about, I believe that we're going to market as well as anyone in the marketplace. I believe that we are continuing to put in place even more capacities, and strategy is even stronger that we will continue to see these kinds of increases going forward. So it looks very, very good on the processed meats side. The margins that we're delivering relative to sales I think are very satisfactory for us. I'm very pleased with the execution of the management of this Company.

Before I go into any discussion about where we think the future is going to be, I'm going to turn it over to Dan Stevens. Dan will give you some of the information from his perspective. Dan?

Thanks, Larry. Good morning, everyone. I just wanted to quickly run through some of the key financial highlights for the quarter. Take a look at our income statement. As we talked about in the press release, sales for the quarter were down about $100 million; this is principally on lower average selling prices in the pork segment. Our volumes are actually up slightly in the pork segment. As well, our beef prices and volumes were both up.

I did want to point out though that going forward, you're going to see some lower sales comparisons on the beef side of the business because of the impact of stud cattle that were marketed last year. This upcoming year, those sales will be part of the Cattle Feeding joint venture. Since we account for the joint venture on an equity basis of accounting, we're just picking up our share of the earnings in the consolidation and not the sales. So, there's no bottom-line P&L impact.

As you saw in the release, our operating profit was 145 million in the quarter, down about $38 million from the same quarter last year. If you add back depreciation of $50 million to the 145 of operating profit, our earnings before interest, taxes, depreciation and amortization were 195 million in the quarter compared to 236 million in last year's third quarter. If you look at it on a trailing 12-month basis, EBITDA was 758 million for the period just ended, just slightly ahead of the 752 million for the same 12-month period ended this time last year.

Our interest expense of 37.5 million in the quarter was just over $1 million higher than last year. Even though our debt balance is down slightly quarter to quarter, our floating-rate debt is about 60 basis points more expensive than it was this time last year.

From a cash flow standpoint, our cash flow from operations was just over $360 million for the first 9 months of the year compared to just under $20 million for the same period last year. Obviously, both periods reflect very strong earnings in our normal seasonal working capital turnaround. But last year, you'll probably recall that we were also investing in cattle and feed before we formed the Cattle Feeding joint venture with ContiGroup.

Take a look at the balance sheet. Our capital expenditures for the quarter were right at $100 million compared to depreciation expense of about 50 million. For the year, we spent some 258 million in CapEx compared to depreciation expense of 153. Again, this increase was all part of our processed meats and our international expansion plans that we've talked about on a number of our previous conference calls. We do expect this level of spending will continue throughout most of fiscal 2007.

Despite the capital expenditure spending, our free cash flow has been positive and we've been funding the capital expenditures with cash flow from operations. We've used the excess free cash flow to pay down short-term debt. At the end of the quarter, our debt was 2.3 billion, which is down about $50 million from year-end and down some $170 million from last quarter end. But, as you know, our second quarter is our peak borrowing period because of our seasonal working capital requirement.

Our other cash uses include for the year the funding of the cash portion of the contribution to the Cattle Feeding JV and 1 million shares of Company shares that we repurchased on the open market -- 1.5 million of those which were contributed to the Company's pension plan.

Just a couple of other items to note. First, our debt to total capitalization came down to 53% at quarter end from right around 56% at the end of last quarter and last fiscal year-end. Again, this reflects strong earnings and good cash flow for the first 3 quarters of the year.

Finally with the paydown of the short-term borrowings during the quarter as of quarter-end, we have about $750 million of availability under the revolving credit facility. So, we remain in very good shape from a liquidity standpoint.

Those are the key financial highlights. Obviously, I can cover anything else during the Q&A. But with that, I will turn it back over to Larry.

Thank you, Dan. I'm sure you are all looking at the future, and we are all hearing everyone's forecast of troubles ahead I guess I would call it. We are clearly aware of the freezer stock levels that are out there. We are all aware of the closed export markets for the beef. I guess we are all concerned about this bird flu issue and how it's going to affect everyone in this industry. So, from 50,000 feet, it may look like the sky is falling.

From our standpoint, we think that the futures market looks quite good for live hogs well into the future -- well past the spring, well into the summer. So I think you see from our press release that we indicated that our raising costs are down from $41 last year to $38 this year. We continue as we've said many times on this call -- we continue to keep a very close eye on our feed cost, and we take opportunities along the way to ensure that our raising costs stay in check and our raising costs stay under control. I would tell you that we are very confident at this point that our raising costs are going to continue to be well under control and $40 or less. With the futures markets predicting better than $50 out to the summer, I think that the hog production side of the business is going to be nicely profitable for at least the next couple of quarters anyway.

The beef business continues to be tough but within range -- within a reasonable range. I realize some have predicted some very bad numbers on the beef side. We're not predicting those horrible numbers. I'm certainly not proud of what we're producing.

Importantly, I would be remiss if I didn't get the point in that we continue to not deliver much from our international operations. We continue to believe that is a very strong long-term bright star for this Company. Everything we see tells us that the opportunities in Eastern Europe continue to be very, very good. So, we continue to invest in that part of the world, and it will be some time, maybe some substantial time. But we are very confident again that that's a part of the world that we want to be investing in. Thus the longer-term, our processed meats business is very good.

I would tell you that fresh meat is the volatile part of this. It's up and down, and it was quite weakened after the holiday after the Christmas season and has been -- fresh pork has not been strong as we have gone into the fourth quarter. But, again, those numbers move around. February is generally the worst month of the year in this kind of meat business. So if I am depressed, it's only because February comes and that's generally one of the toughest -- if not the toughest month for particularly fresh pork and the processed meats business.

But, with that said, there's no disaster there either. I think we've said in the press release that we're guardedly optimistic about the fourth quarter. We think we have a lot in place. We think we have a lot going on. I think we have a lot of it -- a fair amount of that protected one way or the other. As a result of that, I think the fourth quarter, absence from horrible disaster on the fresh meat side of the business, I think it's going to be just fine. I don't see the sky falling for Smithfield Foods.

With that being said, I think we will open it up for questions. Mr. Luter is on the phone, so we would welcome any questions you guys would have.

(Operator Instructions). Christine McCracken, FTN Midwest.

Larry, you had talked a little bit about your beef business and that you don't expect widespread losses I guess like some of your competitors. Can you talk about the differences between your business and theirs that might enable you to do that? Is it a function presumably of your mix of dairy, cattle? Can you talk about whether or not the industry-led buyout in the quarter had any impact on your profitability?

I missed the last part of that question to be honest with you. We're having a little trouble with the muffle. I think we do have a slightly different business model, and many people know that. The other side that we have is we've got our investment in the Five Rivers Cattle joint venture, which that part of the business is profitable. So the raising side of the business is helping to offset some of the losses on the processing side of the business.

Yes, we have seen some losses in the last -- really in the month of February. We've seen some losses on the beef side that were very unpleasant. But, that's not a wholesale situation for us at all. So, I think we're going to see better results because we've got the -- we are on both sides of that business as we are in the pork side of the business, and that helps to moderate some of the results that we're reflecting. I think we have a good business model.

Fair enough. Then, just we've heard a lot about city-widespread death losses in North Carolina tied to PMWS. I'm hearing that it's pretty broadly spread throughout your barns. I'm wondering, can you talk about how that might impact your outlook for hog production at Smithfield and what you can do to control the spread of the virus?

I would tell you the circovirus has had an impact on us in North Carolina. We have had some reduced numbers marketed into our plants -- in our eastern plants, and our volume was down 4, 5%, maybe 6 or 7% even as we speak today. I assume that you've done some of the homework, so you probably do know that I want to allay any fears that may be on this call. Circovirus is not a new virus. In fact, in and of itself, it's not the problem. It's the fact that it weakens the animals and allows other diseases to take effect.

We have had more of that in North Carolina than the Midwest; although, the Midwest does have some of that. We are dealing with it very proactively. One of the solutions that we believe works is the weather. As the weather warms up and you're able to open up the barns, you get more flow through the barns and the incident seems to drop. So we're cautiously optimistic that this is going to favorably impact us as the weather warms up in the East, which will be occurring very shortly.

The other point I would make to you is this is not something that -- yes, you've just seen it in the last day or two -- I mean the last month or so. But, this is an issue that has been around. In fact, our raising numbers in the East have been impacting this even in the last quarter. Even with that said, we're continuing to maintain our raising costs at very acceptable levels, even given this, because we are proactively managing this process. So, it is not having the devastating effects that you do read about, where people are talking about -- view these morbidity issues up to 100% and these mortality issues up in the 10 to 50% range. We're not having those kinds of issues.

It does present itself more prominently in the lower-health status herds. So some herds can have circovirus but in fact have no real problems in terms of the animals themselves. So, the fact that the virus can be present does not necessarily mean it has any adverse effect on the herds. I know that was a long answer to your question.

No, no, we appreciate it. Just in terms of the lower marketing, do you believe that at this point given how the market has rebounded that its pricing in some of these losses, could it in fact help hog prices going into the spring and summer?

I don't know. I don't know if these futures markets have circovirus as part of the futures pricing. I mean I believe some people believe that there are going to be reduced marketing as we move closer to the summer. There's been some animals potentially pulled ahead. So, I don't know if that's attributable to circovirus at all.

This is Joe Luter. There's no question if you have a 1% reduction because of some disease problems among hog farms, that 1% will have some impact up on the pricing. 1% differences in hogs coming to market does have a pricing impact.

John McMillan, Prudential.

If I could just follow up with Joe in terms of -- I know you don't give formal guidance. But there was kind of a hope 3 months ago that you would come a little bit closer to what was a fabulous third quarter of '05. Just kind of what -- just if you can just give us what happened in January beyond what we already know?

Sure. Well, November and December were very, very strong months. January is always an iffy month. What happened in January quite frankly is hog prices plummeted I believe as down to as low as $0.38. The severity of that drop was very surprising. But I've told you many, many times, you do have surprises in the business.

At the same time, the fairly substantial rally that we've had in the last 10 days has been a surprise on the upward side. I think last week, we were receiving around $0.48 a pound for our live hogs. I think it's around $0.45 today. So, we have these -- we had these things swings. As I have been repeating year after year after year, these things happen.

We had a chance going into January of being pretty close. But as you can look at the breakout of the operating profit per segment, it's all in hog production. I've told you and everyone else many times, we cannot predict on hog prices. If we could --

Listen, these numbers are fine relative to an industry group, where everybody is struggling (multiple speakers) --

I think one thing that I would look at is if you look at our operating profit per segment, whether it's in pork or whether it's in beef or the other which is our turkey operation, operating margins as a percentage of dollar sales stands up with just about anybody in the industry, even (multiple speakers) down to so-called processed meat companies.

I'm just trying to take your temperature a little bit in terms of your guardedly optimistic statement in the press release.

Right. It's guardedly optimistic because we do see substantially higher hog prices in the next 6 months than what we have experienced in the previous 3 months. Keep in mind that November and December and January historically are always the cheapest hog prices because of what we characterize as the fall hog run. Now, our prices have rebounded. Right now, there are opportunities to lock in some pretty substantial profits on the hog production side.

So your statement is more sequential that this $0.63 of earnings that you just did without giving formal guidance might be a kind of sustaining number or something that just won't fall off precipitously in the--?

I'm not going to give --

Yes, you're not going to go there.

I'm just not going to go there on quarter-to-quarter earnings and --

Well, I got you there last time.

Some of my competitors have been doing it, but then they are having to restate over and over and over again. So, (multiple speakers) --

Well, Pilgrim's gave up today.

What?

Pilgrim's gave up today giving guidance.

Well fortunately, I haven't fallen into that trap yet, despite proddings for me to do so. It's just -- I'll repeat one more time that if you look at Smithfield Foods in 3 or 5-year segments, there's a great degree of predictability. But, quarter to quarter, there is not predictability and I don't think it ever will be. But if you look at The Wall Street -- I'm sure you read The Wall Street Journal article on Monday and Smithfield I think was the number three food company in the last -- in regard to profitability on the last 3, 5 or 15 years and substantially ahead of most other major meat companies. So I'm very pleased with our results in the past, and I'm very enthusiastic about our future.

Just two related questions because one of the reasons you have had this sustaining record is you've used industry downturns to make acquisitions. There seems to be a lot of assets for sale, potentially for sale. Just in terms of your current appetite and to the extent you can talk about deals that we kind of know that are on the market, like ConAgra's processed meat businesses; deals that were on the market, like Sara Lee's European business; or things that are potentially -- do you see you increasing this debt level and just kind of what's your appetite right now to make a deal?

Well, I've always been hungry, and that will continue to be so. Yes, we're going to be looking at the possibilities. As you know, we've entered in a true agreement with ConAgra to buy Cook's. We will be looking at the other ConAgra assets.

As you know, we've also looked at Sara Lee Europe. We're constantly looking right now. On whether we use equity or debt, I'm not sure. Well, we might even use a financial partner and do some joint ventures. But, the answer is that we see opportunities out there. There are a lot of people that seem to be losing interest in the meat business in the United States. We hope to take advantage of some of those opportunities.

Then finally just on the whole AI issue, where some people have called me and say -- isn't Smithfield a play on AI because pork consumption could increase relative to poultry. I guess lower protein prices are good for nobody. Can you just kind of -- whether you or Larry -- just kind of take the AI discussion a little bit further in terms of how it might impact your results?

Let me say -- and Larry can follow me if you will or -- we take no pleasure whatsoever in benefiting because of disease and competing species, such as poultry. We certainly hope that this doesn't become a major issue. But obviously if it does, I think two of the biggest beneficiaries obviously will be pork and beef and perhaps maybe even pork more than beef because of the mad cow problem that's out there. But, that's an unknown. If it became a big problem in the poultry industry, there's no question in my mind that pork prices would go up dramatically. But, I don't that's going to happen. I think it's under control, and we didn't see any major reaction to the mad cow episode a couple of years ago. Hopefully, we won't see any major impacts come out of the current poultry problem. Larry, did you have anything you wanted to add?

No, the only I would make -- my only comment I would make -- I've made this comment a number of times -- any issue that any of us have in the meat industry, whether that be beef or pork or chicken, I think adversely impacts all of us. It makes one more vegetarian, who steers and eats one of our proteins just a little bit less. Yes, we may short-term -- the red meat guys may benefit from the white meat problem, but that's very short-term.

So, I think we take the issue as seriously as anyone does, and I don't believe -- sometimes, even consumers get confused as to whether some of these diseases even jump a species and such. So they only read headlines, and they only listen to the news for a moment. So if we think we're going to benefit as a result of that, of somebody else's trouble, I think that's us shortsighted by all of us. I don't think we take any pleasure at all in seeing this issue affect any of us in the industry.

David Nelson, Credit Suisse First Boston.

I would like to follow back up on the discussion of hog prices. Obviously, there was a dip in January but a strong recovery. But, overall, hog prices seem to me have been pretty strong considering the implosion in chicken and some of the weakness also in beef. Can you comment on what you're seeing in terms of demand dynamics, both domestically and internationally, please?

I would tell you on the domestic side, January was weak. We think we did have the January hangover from the Christmas season. We have seen that; that has rebounded now in the latter half of February. Hence, live hog prices have responded back in reaction to the meat. Meat prices fell pretty precipitously following Christmas, and most all of the cuts are now up very nicely. We're clean, and we are selling the meat and seeing a lot of interest in the product -- that is domestically.

On the export side, I know the industry is showing sizably good numbers in the latest reported information, which the latest I've seen is December. And that reflects some of the selling of hams into some of the export markets, which is a market we don't access in the fall of the year because we use all of our hams internally.

We have seen actually some price resistance in the markets, particularly even into Romania, as a result of some of the issues that have gone on between Denmark and Japan and that product has backed up into Denmark. We're seeing them push some of that product into Europe at lower prices and being very, very aggressive in pricing of product in the Western and even in Central and Eastern Europe.

So I would tell you that -- and finally, another market that we've been very active in the past is Australia. That market, we have backed away from in the last several months because of the marketings coming out of Canada. They have been very aggressive in placing product into Australia, and I like to tell people we arbitrage the world. So, we go to the place where the raw material is worth the most. Of the last 3 or 4 months, it's been worth most at home.

So, our export numbers are not particularly -- we've had a very, very -- we're comparing to a strong last year. But our export numbers are down just a touch from last year -- just a touch. The industry is up. But the result of that has been that we have improved our margins as a result of processing that back in the United States, either selling it fresh or selling it into processed products. So I think the demand of late since the last several weeks now, demand has been very good and (multiple speakers) --

We don't have any burdensome inventories at all.

That is correct. That's the way of saying it.

Just to follow on -- or not maybe follow on -- but today's Wall Street Journal -- I guess following on your comments about having an integrated model, today's Wall Street Journal talks about animal IDs specific to beef. As you grow out not just your beef business but the pork side, what are you hearing from customers now on having source verification and animal ID because of the integrated model, especially in beef? But are you hearing the customers want that in pork too?

Absolutely. Absolutely. You can not have a discussion particularly with a food service supplier, who will not require you to discuss that subject. So I think it is delinquent upon this industry, particularly on the beef side, not to proactively deal with this issue.

On our beef operations, as you know, we control an awful lot -- well a fair amount of our cattle we control at a very early point. All of our animals are under a tracking system internally; although, it's not part of this national database because that's all state related and the federal government hadn't quite got it all together yet.

But, I believe we are all remiss to pretend this issue is not a serious issue. Traceability with some of our major food service customers is an early-on discussion, and they are extremely interested in that issue. So I mean if there's anything the beef industry ought to do, it ought to be to adopt this and go forward and let's get this done.

Leonard Teitelbaum, Merrill Lynch.

I'm going to try -- and I'm guessing the answer is yes -- but, Joe or -- if you have such good feelings about the fourth quarter, does that mean that you have hedged in your fourth-quarter sales on pork?

I would say somewhat. I don't like to talk about exact positions. But I've said many times in the past, we take opportunities when they present themselves to lock in profits. Obviously with a $38 cost and a futures market that would get rid of some well better than $0.50 in the summer months, there's an opportunity there.

Second, on the beef side of the -- on the cattle raising side of the business, is it your intent -- how much of that product coming out of those feedlots that you don't have an interest in go into your operations?

At this time, it's very, very small. But we have secured the land in the Southwest very close to our feedlots, and we're making plans and considering building a plant in the foreseeable future. I know that may sound crazy today, but it sounded crazy when I built Bladen County's 13, 14 years ago.

But I do believe that the cycle will turn around. We do have enough cattle under feed to supply two plants, where two plants can run 100% of capacity. We are aggressively looking at the opportunities in that area, and we will be applying for permits here very shortly.

So, the endgame here then I guess is to (multiple speakers) do in beef what you've done in pork on the same scale, where you're going to provide 60 to 70% of your internal needs and go limited open market purchase. Is that where we're going with this, Joe?

Well, I'm not sure. Well, right now as I told you, we could build two plants and use only our cattle. But we're probably going to build one plant, and the second plant will depend upon how well we do with the first plant.

But yes, we do believe in vertical integration. We did have last month a very profitable month in cattle feeding, the most profitable month that we've had since we've been in the business. We think the next month will be equally as good. We think the ability to have 100% traceability is going to be a big asset going forward. We believe in a vertical integration model. It's worked well for us in the past, and we would feel confident it's going to work for us in the future.

Joe, have you guys priced out what a new plant is going to cost you?

About $150 million.

Is that over the next 2 years or--?

Probably will be a joint venture. You know cut that in half.

How much do you plan to invest overseas building up that part of the business as Larry spoke?

That will really depend upon how fast we can get the permit. We're very enthusiastic about Romania. As I've said before, we see Romania as the Iowa of Europe. Romania is a net importer of meat surprisingly. We could easily put in 150,000 sows in Romania and not export 1 pound of meat outside of Romania. So it's a tremendous opportunity there. I have to tell you that getting things done in Romania permits and so on, it moves at a snail's pace compared to the United States and that's held us back.

But when we see big opportunities, we will do what's necessary, whether it's attracting a financial partner or issuing more equity ourselves. But, we see opportunities that we're convinced will deliver superior returns, not next year but 4 or 5 years down the road. We haven't changed our philosophy. We make management decisions based on the long-term; I say long-term -- 5, 6, 7 years. We do not make decisions based on -- certainly on quarterly earnings and really not even on next year's earnings. That's how we have been able to build the Company because I think we've had a propensity to look long-term more than some of our competitors that are more concerned with quarter-to-quarter results.

Reza Vahabzadeh, Lehman Brothers.

Now you commented on your concerns on the fresh pork side, is that just the volatility that we've seen in recent times in softness in prices? Or is there some concern around capacity issues in industry and slaughter volumes as well?

No, it's just the day in/day out business of moving the meat and paying for the hogs. That's a volatile -- when you kill 100,000 hogs a day, obviously 2 or $3 moves and $4 moves in a day, which is relatively easy, can be 2, 3, 4, $500,000 a day to your P&L. So, we came into January with some very weak meat pricing; that has strengthened up nicely. That's why hogs fell off; hogs came back. The meat has gone right with it. Today, pork is really pretty good.

CapEx looks to be running at what $300 million a year? Or is it more than that?

Actually, I think we've said on previous calls that we're going to be over 300 million this year, and clearly we are tracking to that. I think these quarters of 75 to 100 million in CapEx are probably going to be with us for the next 3 or 4 quarters.

Then, while you are doing the CapEx, is there any thought for share repurchases?

I do not foresee that for the next 6 months.

George Askew, Stifel Nicolaus.

Just kind of a follow-up question to a prior question regarding the avian flu issue. The last couple of months, we've heard more news flow about avian flu in Europe, obviously the last few months and weeks even. Have you seen any impact to your protein businesses in Europe from this, either positively or negatively?

No, not really. Nothing significant to us at all at this point.

Anything to the market -- to the protein markets overall? Are people shying away from chicken by chance?

I think you have seen some protein consumption in France dropping pretty dramatically, and yet you have seen protein consumption -- or poultry consumption in UK having virtually no impact on their consumption. So it's a country-by-county reaction. But from our standpoint in our operations, we don't really have any poultry in France. Then in our operations in Poland where we do have some poultry operations, we've had no noticeable impact at all. In fact, our poultry business is really pretty good.

Speakers, I will turn it back to you for any closing comments.

If we have more comments questions, Operator, we can take them. I believe Jon Feeney has a question?

Jonathan Feeney, Wachovia.

A quick question for you, Joe, from a historical perspective with chicken prices at or near 5-year lows, can you give us some perspective of how that historically has affected demand for pork? Is it a one-to-one trade-off relationship when chicken prices come down? Could you just give us some color around that and how that plays into what you're thinking about processing margins over the course of the spring and summer?

Does it have an impact? The answer is yes. Is it one-for-one? The answer is no. There are just so many factors out there, such as export demand, that are just unpredictable. But, generally speaking, if you have an excess of protein, it does drive prices down. But the poultry industry has been more disciplined I think really than the hog industry in regard to cutting back when there's an oversupply. I suspect that the smarter people in the poultry industry will cut back. Obviously, no one wants to be the first. But I think that you'll see some of that.

But it's just the cycle. I mean what we're going through right now is no different than what we've been going through for 100 years. That's -- there are ups and downs. But I repeat one more time, when you -- when prices get cheap and you even lose money on it -- excuse me; I have to sneeze (multiple speakers). I just had to sneeze unfortunately.

In any event, normally when we get to the point where there is little if any profitability in the hog growing side, there are dramatic increases in the profitability on the processed meat side simply because the meat is very, very cheap and the demand is very, very good. So we have both sides covered, and I think you saw that in the last quarter. We had a dramatic decrease in the price of hogs, down to $43.

If you ask me to give what is a normal price range for hogs, it would be in the $43, 45 range over the last 10, 15 years. As a result, what did you see? You saw a dramatic increase in our pork profitability and pork processing despite a dramatic drop in the hog production segments. So the model works, and this is what I've been preaching now for over a decade.

Without a doubt. Just, let me ask it this way, Joe. How does what we're seeing right now in your opinion as far as you are taking exports, backing up into the US due to AI scare oversees compare with say April 2002, the beginnings of what was a pretty ugly oversupply situation that carried over to everybody?

I think the possibility is certainly there. Do I expect hog prices to go down as a result of an oversupply of chicken? The answer is yes. But, that will be temporary in nature. When I say temporary in nature, I talk about 1 quarter, 2, maybe even a year. But, the markets correct themselves.

Keep in mind that all of these industries operate on 1, 2, 3% profit margins. So, when you get into a loss situation, people do cut back because of necessity. There's a very fluid, elastic market that's out there in perishable meats. It always has been; it always will be. But, it's nothing unusual to having that there today that is any different than what's been happening for the last 100 years.

Just finally for Joe or Larry, there's a lot of assets out there as John alluded to. You've done a couple of small things but have been a little bit I guess more hesitant than I would've otherwise expected. Is valuation a concern out there due to maybe some of the activity in financial sponsors in this space? Or is it just that the timing is not right on some of these big, big deals that are out there to do?

I would say we have not been hesitant, and I don't know of any big deals that have gone down that we haven't been involved in. We just -- hopefully, we will close in the next 30 days the Cook's transaction, which is not a small transaction. We will be looking certainly at the ConAgra assets very, very seriously. I do expect that a lot of people that are not happy with the results in this industry -- and I've always said there are more opportunities in bad times than there are in good times.

We can buy the assets at the right price. If it means that we have to increase our equity or take in a financial partner, we're prepared to do so. But I would say our growth appetite is just as strong today as it has been for the last 10, 15, 20 years.

Tim Ramey, DA Davidson.

Joe, we know where you want to end up in terms of processed volume sort of doing everything -- further processed, and we know where you started. But I really don't know kind of where you are at now with some of these recent capacity additions. Can you kind of give us an update on how much further you have to go in terms of adding processing capacity?

We're pretty close to being there with the increased bacon lines that we have just completed putting in and additional ham capacity we expect to not be a major seller at all of bellies and hams going forward.

How about trim?

Well, there's some trim. But, here again, if we would buy the ConAgra's undried sausage business, that uses up an awful lot of trim.

As we think about the international expansion -- if you had to give that a scale of 1 to 10, can you rate where you are on that? Are you more like a 2 on that or--?

Well, we are much further behind than I expected as I said earlier. The permits have been extremely slow coming in from Romania and Poland, but we see a tremendous opportunity there. I told Larry as recently as yesterday that I think in 5 years' time that Romania could very well be the most profitable production asset that we have simply because of a deficit of meat in that area of the world. With transportation costs being what they are today and probably going upwards, distances become much more important as fuel costs increase.

So just the -- when you have cheap corn, cheap feed, cheap labor, a lot less distances to move the grains plus the finished meat, it's a win-win scenario. We have the only major plant in Romania, which we will be bringing on-stream in November or December of this year.

Now that the Sara Lee thing is off the block, is there any comments you can make about that or--?

What was that again?

Now that the Sara Lee property in Europe is off -- is no longer on the block I guess, is there any comments you can make about that?

Right now, we are just governed by a confidentiality agreement. I wouldn't want to comment on that. I assume that Sara Lee will be selling those assets to somebody. All I can tell you is that we're still in the game.

Farha Aslam, Stephens, Inc.

I know you don't give quarterly guidance, so I was hoping to get a little bit better understanding on some of the details as we go about doing our work. When you look at your hog processing, you talked about locking in some profits. We were hearing that it was possible to lock in about $20 profit per head of hog. But would you be in the right ballpark if we thought about that over the next 3 to 6 months?

Well, I mean in June, July, probably you can lock in $50 or 38; that's $12 a hundredweight. So that's 24 -- that's $30 ahead.

So you're going to be kind of in really great shape in hog raising through the July timeframe. But, when you look out further, we're hearing that there could be significant pressure on hog prices, particularly with more supply coming in the market, and looking out into the fall and particularly into the summer of '07 that it could be almost breakeven-type levels on hog growing. Do you think that's too dismal of a picture?

That could happen. But, the people were projecting the exact same thing last year at this time about what was going to happen with the fall that we just went through and it did not happen. Did the prices go down? Yes, they went down to where they averaged around $43 during the third quarter.

But here again, as I've said, we cannot predict hog prices. We cannot predict export demand. We cannot predict what China is going to be doing. It could have a major impact on -- I saw just last night that China said they will not be exporting anymore corn. So that will have some impact.

But there's no question in my mind that a lot of people that have been very, very poor in the world are now becoming more affluent in countries such as China. That meat demand in the next 5 to 10 years in my opinion is going to be very, very strong. It's going to be hard to meet that demand in light of big segments of the population that have not been big meat consumers simply because they couldn't afford to be.

Could you just share with us your thoughts about Indiana seeking to increase its role in hog production and the possibility of doubling their -- they are seeking to double their production of hogs in Indiana. Do you think that's going to be a near-term target or it's going to be years in the building?

Oh, I think it will be years in the building. I think any substantial increase in the number of hogs in the United States will be counterproductive and will drive prices down. But if that happens, you've seen Indiana numbers have gone down for a number of years. But, I've heard the same thing that you heard.

But, I think one thing you should keep in mind -- if you look at all the new plants that have come on-stream, virtually all of them have been built by people that owned hogs in the last 10 to 15 years. People that are not vertically integrated that are not in the hog growing business are not building plants. People that are in the hog growing business are building plants. I think you need to recognize that fact.

Is that the fact that there's more and more people, who have plants that are in the hog raising business, and historically hog raising has higher margins than processing that folks like Smithfield and others, who are vertically integrated, are going to run their operations for hog production rather than pork? So kind of the dips we see in the pork cutout values and the pork margins in the spring, is that going to be a permanent phenomenon versus historical, or do you think it's a near-term blip where you see February, March and April last year were very, very weak? Do you think that's going to be the same again in the pork processing area this time around?

I see that happening, yes.

Again?

I see that people that are vertically integrated look at the entire pie, not half of the pie. There's no question that the better returns on invested capital have been in hog production, rather than meat processing for at least 10 years, probably 15 years. Why people in hog production want to get into the least profitable into the business, it's surprising to me. But, that seems to be that attitude out there. But in Smithfield's case, we went from meat processing into hog production, not the other way around. But, this is America and people have freedoms of choice to do many things.

My final question is just on beef. Kind of looking into this year and into next year, your profitability in beef -- so far, it's been helped by your JV. Do you think that's going to continue to help your numbers, and do you think you can still stay kind of breakeven for the year at this year? Do you think you can make money going into next year in beef, or do you think that's going to be another tough market?

I think beef processing is going to be tough for at least the next 12 months, if not the next 24 months. So I do believe the vertical integration model will soften that impact. If I thought that beef was going to stay this bad forever, obviously we wouldn't be moving ahead to build a new plant. But, we do expect it to change. These cycles always change. The question is just when and it's a timing issue. But, we hope to be substantially bigger in beef when the beef cycle turns profitable.

Ladies and gentlemen, that's the end of our hour. Joe, would you like to make some closing comments?

No, I think we pretty well have covered it, Jerry.

We thank you all for your interest in Smithfield and look forward to speaking with you next quarter. Thanks for joining us today.

Thank you, ladies and gentlemen. Again, this conference will be available for replay after 12:30 PM today, running through March 8th till midnight. You may access the AT&T Replay System at anytime by dialing 1-800-475-6701, access code 820103. That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.