Smithfield Foods Inc (SFD) 2007 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Smithfield Foods fourth quarter conference call. At this time, all lines are in a listen-only mode. Later there will be a question and answer session, and instructions will be given at that time. (OPERATOR INSTRUCTIONS) As a reminder, today's call is being recorded and you may access the AT&T executive playback service by dialing 1-800-475-6701 from within the United States, and then enter the access code of 874736. Today's call will become available on the replay system starting at 12:30 p.m. eastern time. That's today, Thursday, June 7th and will be available through Thursday, June 21st at midnight.

With that being said, I'd like to turn the call over to today's host, Mr. Jerry Hostetter. Please go ahead,sir.

Good morning. Welcome to a conference call to discuss Smithfield Foods' fiscal year 2007 fourth quarter results. We'd like to caution you today 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 2006. With us today are Jeff Deel, Controller, Executive Vice President Bo Manly, and C. Larry Pope, President 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 and good morning, everyone. I'd like to report to you this morning our fourth quarter earnings of $39.9 million from continuing operations or $0.35 a share compared with $6.3 million or $0.06 a share in the fourth quarter of last year. For the 52 weeks ended this April, $188.4 million, or $1.68 per share compared with $185.2 million or $1.65 per share.

As you look through the -- hopefully you had an opportunity to read the press release and you'll see that there's been a fairly significant shift in our earnings in terms of the nature of these earnings between where we've been over the last couple of years compared to where we are today. As I've reported to you many, many times, our hog production business has been carrying Smithfield Foods now for quite some time for quarter after quarter after quarter, it seems like i'm reporting the same thing. As you look at the segment reports this time, you will see that's not the case. And in fact, meat processing business is delivering the majority of the earnings for this company. This, I think, pretty clearly demonstrates the value of our integrated model that we've talked about from time to time with you. And I think as the proper pressures in the hog production side of the business have grown, grain related as you know, grain is having its impact on the hog production side of the business, as well as the turkey and beef businesses are being, live part of the business are being adversely impacted. However, the meat processing business is performing, very, very well.

I am reasonably pleased with the quarter. I will tell you I'm not excited about the quarter. There is an awful lot of opportunity embedded in some of these numbers that I think that we will be extracting over the coming quarters and the coming years. Some things that I hope you picked up in our press release, the acquisitions, really the last several that we've done particularly this year and even following on the Cook's acquisition at the end of last year. I'm pleased to report to you that those have all been immediately accretive following their acquisition and that applies to the Cook's business, the group Smithfield, the Sara Lee meats that is now group Smithfield, the Armour Eckrich business we bought this fall, and Premium Standard Farms, well, I guess we'll see that as we go forward, but those three processed meats companies have all been immediately accretive, which, they demonstrate our ability to take these acquisitions to merge those into our operations and extract the opportunities that are there.

You will note there's quite a bit of noise in this press release, I'm not going to go through that in any detail. Mr. Manly is going to give you a full report as he does his financial report. But you will note that we continue to rationalize some operations in this organization. Both on the fresh meats side of the business we did a couple of years ago, as well as we have closed on a temporary basis the second shift of our Sioux City, Iowa fresh pork plant. We have continued to rationalize processed meats operations. You've seen several impairment charges over the last year and a half. I'll report to you a little later after Mr. Manly's comments that I will expect to see potentially a few more rationalizing charges as these-- as we make the right decisions to align our capacities in line with solid business, not just chasing low margin business. And I'll speak to that.

As well, we're exiting businesses that are not core to Smithfield Foods. As you remember, late last summer, we sold the Quick To Fix business and there's a charge coming through from the settlement of that in discontinued operations and, as well we have made a decision to exit the biodiesel operation, which we started a couple of years back, given that the profitability associated with that has moved back into the raw material side of that. Input costs, the input pricing there, and so essentially we're getting all of the benefits of being in a biodiesel business without being in the biodiesel business. So we made the decision to exit that.

On the fresh meat side of the business, on the pork side, margins are better. For this quarter margins have improved, you've seen that from others in the industry, margins are letter. On the processed meats side of the business, margins are much better. Of the $60 million that we improved quarter-over-quarter, the vast majority of that improvement was in processed meats, not fresh pork, although fresh pork was better.

On the beef side of the business, it's a mixed bag. Our processing margins were very solid, I'm very pleased with those, I think I said many times that our beef operations compared very favorably with others in the industry. And so when the business show up on the processing side of a ledger, we usually do pretty good and our margins were quite solid on the processing side. Unfortunately, cattle raising continues to be unprofitable for the company. As you know, we've got some programs that have longer periods of feeding than some of the others in the industry. And the combination of higher priced feed or cattle going into that operation combined with $3.50 plus corn puts us in a position where it's difficult, really impossible to recover those in terms of cattle pricing today. I'll talk about what I see going forward a little later.

On the live production side of the business, and that applies to both beef, cattle, and turkeys. Grain is having its impact. All three of those businesses are showing, as I just discussed on the cattle side, but even on the turkey side and the hog production numbers are showing as a separate segment. Increased grain prices are having their impact. And we are seeing fairly significant increases in our costs. However, you do see that the live hog market is up and the cattle market is up. So some of that is being recovered back in the pricing of the live animals in the processing of which we're still being more profitable in processing side.

That leads you to a clear understanding that the cuts are up, but not enough to cover all of these increased costs. Despite the fact that live hog prices and cattle costs have increased, they have not increased sufficiently to cover all these grain, all these increased grain costs. I know many of you have a full understanding that we do take hedging positions and that those hedging positions should be protecting us against some of these, some of these increases and they have. They just don't fully protect us. And some of that has come through with increased costs.

Importantly, the international side of the business continues to improve. And demonstrative of that today is Mr. Manly and myself are actually placing this call from Europe. We have been in Europe since this weekend with our Board and our Board has been reviewing our Romanian, our Polish, and our Western European operations with managers. We actually had our Smithfield board meeting in Leon, France, just yesterday to give the board a much clearer picture of the impact of our foreign operations and our European operations. And the fact that I'm very encouraged by what I believe is going to be the future profit driver -- the profits that will be driven from this end of the business.

I know many of you in the past have questioned the validity and our continued investments in Europe. We are very confident those investments are beginning to pay off and are part of a long-term strategy. So they're not delivering anywhere near what we think they can. But it is sufficient that now it's of some substance on the segment P&L and it's a substance that I'm bringing my board of directors here to give them a full understanding of this end of the business. And Mr. Manly and myself are spending significant time in Europe as we make sure these businesses mature and deliver what they can.

I guess beyond that, the other operation I'm going to pass to Mr. Manly. But the meat processing business has its pressures. We're all feeling the increased costs associated with these utilities, the transportation cost, labor cost, all of those are impacting all of us in the industry. We at Smithfield have also -- have taken those pressures and taken those cost analysis to a level that we're going to do something very significant about them. And that's the reason for some of these rationalizations. But you can see from the segment information that we are delivering profits in spite of the fact that we're having these charges. And I'm confident that we're going to transition this company to a very efficient low cost producer.

We put in place about 2 years ago a strategic sourcing operation to drive out some of the cost of some of the items beyond just the meat costs such as the packaging cost and the supply costs that go into this. And we've been very effective with that. We don't brag about that, but I can assure you we've been very effective. We are taking a very close look at all our manufacturing operations in terms of the overhead costs associated with running those plants. And I have made it my commitment that I am going to make sure that from an overhead standpoint, we are highly competitive in spite of these cost pressures and we are going to increase the capacity utilization of the facilities that are part of the long-term strategy of this company.

If we cannot achieve increased capacities to cover these costs, than we are going to make decisions and going to make tough decisions to rationalize those operations out. So I am confident that those are beginning to show up, as well and you're seeing the pork segment. You saw us start taking some of these charges a year and a half ago. And those year and a half ago charges are now positioning us at a much better cost structure. And I think that's going to bear fruit in these coming quarters.

We have purchased Premium Standard Farms organization. It came into the Smithfield family here just a couple of weeks ago. We have already migrated that business into our existing operations. One plant went into the Farmland Foods organization, another of the processing plants went into the Smithfield packing organization in our hog production operations. Immediately transitioned into our western hog production operations, I will tell you that that went without a hitch almost immediately. And Mr. Manly was responsible for transitioning that and he is the previous president of Premium Standard Farms. So Bo had an awful lot of experience there and Bo was instrumental in making that transition go without a hitch to our operations, or to our customers. So I think from our standpoint, the Armour Eckridge that we bought, the Cook's business that we bought, the Sara Lee business that we bought and the Premium Standards Farm business that we bought all really within the last, say 13, 14 months have all been migrated very nicely into the Smithfield organization.

And as I said, the fact that they are have been immediately accretive to this point is very gratifying to me. And the fact that our pork segment is now demonstrating some of the benefits of some of the rationalizing makes me feel that we are positioning ourselves as a low-cost producer. And I am committed to making the processed meat side of this business be an important part of this profit stream to this point that it has not. Certainly, we will always be a fresh meat company and beef is an important part, but processed meats to this point have not delivered to where they should have and I am absolutely committed to making that happen.

Before we take questions and before I give you my view going forward, I'm going to turn this over to Mr. Manly. And unfortunately it's probably going to take longer than normal because he has quite a bit to say. And then I'll come back to you and talk about where I think we're going. Bo?

Thank you, Larry. Bon Giorno, buona sera, ladies and gentlemen, whatever time zone you may be in. Before I review the highlights of our fourth quarter and fiscal year, I would like to remind you of several changes that occurred during the past year that impact several segments affecting the comparability of year-over-year comparisons. Do recall we acquired Cook's in the last quarter of fiscal '06. Armour Eckrich in the second quarter of fiscal '07. In that same period, our joint venture turkey operation acquired the Butterball turkey business, and the Butterball results are included in the other category in the operating segment report, and included in equity of income of affiliates on the income statement.

Our French operation, Jean Caby, was merged with Sara Lee's European operations into a 50/50 joint venture known as group Smithfield in the second quarter of fiscal '07. Even though we did not close the Premium Standard Farms acquisition until the first month of our current fiscal year, I think you will agree that fiscal 2007 was a very active year for Smithfield. I will forgo repeating results from continuing operations, which Larry provided you earlier and move on directly to net income. Net income for the fourth quarter, including two operations classified as discontinued, was $37 million or $0.33 per diluted share. Versus $1.1 million or $0.01 cent per share in the previous year. In the fourth quarter, the company decided to sell Smithfield Bioenergy Operations and its assets.

In addition, the company recognized the loss on the post closing settlement of the sale of Quick To Fix. These two items had a combined impact in the fourth quarter of fiscal '07 of $2.9 million net of taxes or $0.02 per diluted share. The impact of these items on the fourth quarter of fiscal '06 was $5.2 million net of tax and $0.05 per share. These discontinued operations had an impact on the full fiscal year 2007 of $21.5 million net of tax or $0.19 per diluted share versus $12.3 million or $0.11 per share in fiscal 2006.

In an effort to restructure operations to gain efficiencies and improve return on assets, the company incurred two impairments during the fiscal year. These included a pretax charge of $8.2 million or $0.04 per diluted share in the fourth quarter related to impairment of assets in the beef segment. In addition, the company incurred impairment earlier in the year to our Brazilian swine operations of $4.2 million pretax. The combined impact of these two charges was $12.4 million pretax or $0.07 per diluted share for the full year. This compares to impairments last year related to restructuring Smithfield's East Coast pork processing operations that impacted fourth quarter fiscal '06 by $10 million pretax or $0.05 per diluted share and $26.3 million pretax for the full fiscal year or $0.14 per share.

Sales increased $386 million or 14% in the fourth quarter compared to the same period a year ago. This is principally due to increased sales contributed by Armour Eckrich and Cooks, partially offset by no consolidated sales from Jean Caby. Sales for the full fiscal year increased by $508 million or 4%, impacted by the same factors as for the quarter, but with lower cattle sales, as well. Gross profit improved for the fourth quarter compared to the same period ago from 8% to 10%, principally due to solid, improved results in domestic and international packaged meats. Margins for the full fiscal year declined fractionally, 0.1%, compared to the prior year.

SG&A expenses increased 35% in the fourth quarter compared to fiscal '06. This reflects increased expenses associated with the addition of normal activities of Armour Swift Eckrich and Cooks as well as certain ongoing transitionary expense of the Armour Eckrich business and foreign currency losses. SG&A for the full year increased 11% compared to fiscal '06 impacted by the same factors, but to a significantly lesser degree in the first three quarters.

Interest expense rose 23% and 18% for the fourth quarter and full fiscal year compared to the same period a year ago. The increase was driven by total borrowings increasing from $2.6 billion at the end of fiscal '06 to $3.1 billion at the end of fiscal '07. Borrowings increased due to the acquisition of Armour Eckrich and investments in cooked ham plant in North Carolina, group Smithfield, Romania, and Poland. The company's overall average borrowing rate declined 28 basis points to 6.60% during the course of the year.

The result of equity in loss and income of affiliates showed slight losses in the fourth quarters of both fiscal '06 and '07, caused by seasonal declines in turkey profits and losses in cattle feed. For the full fiscal year 2007, affiliates post growth from $9 million in fiscal '06 to $39 million in fiscal '07. Butterball and Campo Frio had solid earnings. Group Smithfield continued to outperform expectations. Cattle feeding experienced losses due to high grain and feeder cattle prices, but we are optimistic about cattle feeding at the Five Rivers joint venture in 2008.

EBITDA for the fourth quarter was $160 million compared to $109 million for the same period a year ago. For the full fiscal year, EBITDA was $668 million compared to $653 million in fiscal '06. The effective overall income tax rate declined in the fourth quarter and for the fiscal year. Our annual tax rate fell from 33.6% in fiscal '06 to 25.4% in fiscal '07, principally due to a beneficial mix of lower tax profits from foreign operations as well as a significant one-time reduction in tax resulting from the merger of two subsidiaries, Morlini and Agrif, in Poland.

This restructuring enabled us to recognize a one-time $10 million reduction in tax in the fourth quarter of fiscal '07. Lesser tax benefits will be available from this merger over the next few years. Our effective tax rate for the first three quarters of fiscal '07 was 27.5. So the entire impact of the 25.4% for the full year must be reflected against fourth quarter income. This results in a fourth quarter tax rate of 15.3%. As we move into fiscal 2008, we anticipate our tax rate to rise back too more normal historical levels, between 30 and 31%.

Larry will provide you with a description of activities in the various business segments of Smithfield. But the financial highlights are as follows: Total consolidating operating profits improved in the fourth quarter of fiscal '07 to $95 million or a 97% increase compared to the same period in fiscal '06. Operating profits for the full fiscal year were flat at $428 million, only $1 million above results in fiscal '06. Corporate expenses were up for the quarter and the full year due to foreign exchange losses and increased pension expenses, and increased costs associated with corporate purchasing functions, which produced solid ongoing savings within the other operating divisions that Larry spoke to earlier.

Turning our attention to the balance sheet, capital expenditures were $128 million for the quarter and $479 million for the entire fiscal '07 compared to $391 million for fiscal '06. Depreciation for fiscal '07 was $221 million. Major capital expense categories were the cooked ham plant in North Carolina and investment in Group Smithfield, Romania, and Poland. At the present time, we expect CapEx to exceed depreciation in fiscal '08 in the 375 to $400 million range.

At year-end, total borrowings were $3.1 billion, $100 million over the end of the third quarter and $527 million over a year ago. At the end of the year, we had unused US and Euro revolving credit facilities providing over $430 million in available liquidity. Debt to total capitalization rose by year end to 58%, 7 days later, on May 7, we concluded the PSF acquisition. Paid principally with stock. On a pro forma basis, the debt to capitalization ratio declined at that point to approximately 53%. At year end, the debt to EBITDA ratio increased to 4.8. While the PSF acquisition required the assumption of term debt and a modest amount of short-term borrowings, the addition of PSF normalized fiscal '07 EBITDA would reduce our debt to EBITDA ratio to 4.4.

On a final note, I would like to report that the PSF transition is proceeding at a rapid pace. The different geographic segments of PSF are being managed by the existing independent operating companies on a geographic basis. Extracting immediate synergies and efficiencies. In conclusion, I would like to personally thank Larry and the Board for their support during my short tenure as CFO. I can attest to the strength of the financial staff at Smithfield and I'm pleased with the choice of Carey Dubois as my successor.

And with that, I'd like to say, grazie molto, ladies and gentlemen. Larry, would you please take over?

Thank you, Bo. And Bo makes that last comment sound like he's leaving. Bo's not going anywhere. In fact Mr. Manly is chained to the desk. He is very valuable to this organization and we're going to redirect Mr. Manly's responsibilities back to the original reason he came -- graciously came back to Smithfield, which is to focus on the meat processing business. He's been quite a good CFO here for this interim 6-month period, Bo, and I thank you for that. Bo is a very skilled meat processing executive and there's lots to do as you can tell from what Bo just said in that very long financial report.

We are extremely active. In fact, this past 12 months may have been one of if not the most active periods in Smithfield Foods history. And I think that this management team working for Smithfield has done an excellent job of migrating these companies together and taking these acquisitions and repositioning this organization. I think we are -- we are set to propel. Looking forward, we will be wrestling with continued high priced corn, even where we've got hedges, those hedges do run out. I've said before that $4 corn could impact this operation by $300 million. We've now added Premium Standard Farms. Grain prices have come off a bit, just a bit. But we've added increasing needs for the -- for corn as a result of PSF and 250,000 sow, and essentially 4.5 million hogs. That impact continues to be in the $300 million range and we will wrestle with that.

Fresh meat has been tough. In spite of the fact I said it was better this quarter, it's not nearly where it should be. Those high priced hogs are not fully translatable into pork prices at the wholesale and retail level. So fresh meat has been tough on the pork side and I expect it will continue to be tough. Beef has been better. Beef could be volatile, it's trended better. Their export markets, I guess it depends on the day of the week. Exports look like on the beef side they will continuing to be moving up, albeit very slowly. Korea is open and closed, and Japan is open, but only to food service, not retail. So we can't look for exports on the beef side to bail us out of this thing in any short period. It is better.

The processed meats on the international side of the business are an excellent focus and it's where I'm spending my time. It's where Mr. Manly's knowledgeable. Our international business is hitting at least parts of it very strong and the other parts are certainly meeting our expectations if not exceeding our expectations. The processed meats business is a constant focus every day. I think our margins and that in the business are moving up and moving up very nicely, and I am going to continue to concentrate on that nearly 3 billion pound segment of our business that has been untapped and represents a big opportunity for this company.

I think from an overall standpoint, we're building a very solid company. I think we've got foundations on the production side of the business, strong foundations on the live production to fresh processing, and now the the processing processed meats and fully cooked ends of the business. Our vertical model continues to work. This quarter's clearly demonstrates that in terms of the numbers in the various segments. As hog production margins drop, meat processing margins come right in to fill the gap. I can't promise you that every time that's going to occur, but I can tell you that the integrated model is very solid and protects us against the downturns in one segment of the business versus the other.

As I look forward to next year, I said in my comments in the press release that I fully expect this coming year to be better than the current year in spite of the impact of this high priced grain. I think the other parts of the business that have not -- are not delivering where they have been will more than make up for the grain impact. I am expecting this coming fiscal year to be better than fiscal '07.

So with that being said, Jerry, I would welcome any questions. Bo and I would any questions they might have.

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

Great. Thank you. (OPERATOR INSTRUCTIONS). Our first question this morning comes from the line of Diane Geissler with Merrill Lynch. Please go ahead.

Good morning.

Hi, Diane.

Just few questions. This year, obviously, circle virus was a problem in your hog production group. Is there any way you can quantify financial impact from circle virus? And just as we continue into '08, it sounds like it's going to be much better, but still may be somewhat of a drag as the hogs make their way through the processing.

Diane, we have been battling circle virus now for two years. And I can tell you our reports are now. I think we're at the end of that process. We've told you a number of times that the vaccine works. We are trying to buy as much of the vaccine as we possibly can, and we are vaccinating about two-thirds of the hogs or the pigs that we want to vaccinate, so a third of the animals are not receiving the vaccine in spite of the fact that we want to. That vaccine does come with a cost. I think before we've quantified that cost, Bo, in the range of about $1-$1.25 a hundredweight. I think we will see the beneficial effect of that.

It will be gradual, Diane, but at least the numbers of hogs coming to market toward the middle and latter part of this summer as we lap ourselves on the track will be improved. Both the weights will be improved and the number of animals coming to market will be improved. I hope I can report to you that 12 months from today that circle virus is a disease we have controlled and is behind us. Albeit it probably will increase our raising costs. Today it's increasing our raising costs something like $0.50 or $0.60 a hundredweight. We may be able to moderate that cost. We're probably going to have an increased raising cost associated with it, which is controlling this. Does that help?

It does help very much. But I was also thinking in terms of the early mortality in some of the herds you had where you maybe fed the animals and then it didn't meet market weight. Is there a way to quantify that impact?

I guess I'm not sure how to answer that question.

That's a very inexact science. And all you can really do is look at historical levels versus current levels of performance. And you're just going to put a mark up on the wall and hope you get it right. I guess I would like to say that we do know from animals that are on the ground and what our inventories look like, that very shortly as we get to the end of the summer, the numbers of hogs coming to market, particularly in the east coast, start to ramp up to improve numbers on a year-over-year basis. And we will have the impact of improved performance flowing through probably within the next 90 to 120 days, we'll actually start to hit our P&L in terms of improvements. Otherwise, all we're doing is just guessing about two moving variables, one to another.

But, Diane, if it's $1 a hundred weight, that's $2.50 a pig on 14, 15 million pigs, it's somewhere in the $30 to $40 million range on an annual basis.

Plus PSF.

PSF, Bo's making a good point. Premium standard farms does have some circle virus issues, as well in their eastern operations.

It will affect their 2.5 million pigs they raise in the east coast.

Okay?

Okay. I appreciate that. And just a question on the plant rationalizations, et cetera. I guess my question really comes back around then to you're obviously -- it sounds like you're focusing on capacity utilization rates. Swift was sold to another company. You've made no secret about how you want to be bigger in beef. Is there any decision on the beef plant that was announced? And plans to know what you're going to do with that?

Diane, I'm not surprised you're asking that question.

I ask it a lot, so --

I thought that would be your first question. We were involved in the Swift process early on. We looked at the -- we looked at the -- those assets. In fact, we made a bid as most people in this call know. We were told, we were sort of rebuffed pretty early in the process, or really not rebuffed at all in a large way, we weren't talked to at all. The price that these assets were sold at I will tell you was clearly above a price that Smithfield Foods was interested. We are not the least bit disappointed that we were not the successful buyer of that business. And we wish our friends from the South good sailing here. I think they may find the water rough in the United States.

We are going to -- we've got this property in Oklahoma that we've been holding off on making any decision pending this Swift opportunity as virtually everyone knows. We are now going back and looking at that option. And I would tell you that I think we're going to do something here one way or the other in this next 90 days. We're going to make some decision one way or the other. And go forward from here. We had held off and we held our decision in abeyance. I would tell you that we continue to consider that plant very -- very, very seriously as well as a couple of other options that are out there. And we have a very strong interest in being bigger in the beef business. And we're going to -- we're going to make some decisions, as a result. We're not going to stay where we're at.

Okay. All right. Well I appreciate you giving us at least a time frame on that. I guess I'll turn it over. Thank you.

Okay.

and we have a question now from the line of Pablo Zuanic with JPMorgan. Please go ahead.

Good morning, everyone.

Good morning, Pablo.

A couple of questions, I want to focus first on the equity income line. This quarter, one million, it's probably, you would say such a small number why should we even talk about it. But in the last quarter it was a big number and almost half of EPS.

What line are you talking about, Pablo?

Equity income.

Oh.

Which last quarter accounted for 45% of your earnings. So Larry, what I want if you can help me out here. Give us some color in terms of Group Smithfield, how much does it contribute to that line? Butterball, what was the number, how was it relative to January quarter, understanding January was seasonally better, of course, And then just give us some color there, please.

Mr. Manly, you've got more detail. That is where all of our joint ventures, as you well know, Pablo, that's where all of our joint ventures are running through.

Which is an area of focus for investors, potentially for you guys, but we don't get a real disclosure there.

Just find the right paragraph here, Pablo.

Larry, while Bo looks for that, can you give us a sense of the opportunities there? What you think are normalized profit margins for Group Smithfield for Butterball, turkey prices going up, thank you?

Pablo?

Yes.

Affiliates posted $39 million in '07 compared to $9 million in the prior year. Profits for Butterball were $24 million, Group Smithfield were 14, and Campo Frio was 9. More than offsetting losses in Five Rivers and we had some minor losses in some Mexican swine operations, as well.

Right. That's very helpful. Now, as we look forward, Larry, there, understand the opportunities of Group Smithfield and Butterball. How should we think of normalized earnings there as we look into '08? Particularly in Group Smithfield and Butterball?

I would tell you, Pablo, I think Group Smithfield is a packaged meats operation. So the profitability there is going to be pretty solid. The Butterball business and the cattle raising business, which is what's running through here, we're making very solid profits at Group Smithfield. On conversely, we're in the -- where we believe -- and the other side are these are reported on an after tax basis. Most of these report after taxes, Pablo, so. We think we're going to have some very, very solid numbers on the Group Smithfield side. I think we're going to have very solid numbers on the Butterball side. Unfortunately, I think we're going to have some very sizable offsets, some modest offsets on the cattle raising side of this business. What else is going through there, Bo?

You've got the Group Smithfield. Northson.

I think that's going to be solid. That's going to be solid.

No. I understand, Larry --

Your specific question, Butterball, if we knew exactly what corn was going to be for next year, we'd have a good idea of what -- that's going to be the major influencer of profitability in that business. The Group Smithfield is-- remains a work in transition. We had very, very solid results this year. We're anticipating significantly improved results as we go forward as they start to get the advantages of the consolidation and improved processes that they put in place there. That will be not impacted at all by corn prices. It's merely in the packaged meat business. So we look for a different driver in terms of consolidation of that existing operation in Europe, influenced by a different set of factors.

Pablo, I wish I could give you much easier numbers. I know you struggle, this is not the first time you've asked that question. The problem of that line item is there are multiple things and multiple directions from turkey to cattle to foreign operations.

Sure.

So it's a -- from our side it's a plus minus minus, and a minus plus plus, and a plus minus plus. But I will tell you, cattle has an important impact on those numbers. And as you probably know, our Five Rivers operation raises between a million and 1.2 million cattle a year. I would tell you to factor into your thought process whether cattle is profitable or unprofitable because that has a big swing with it.

and I mentioned earlier, Pablo, while we were disappointed with results in Five Rivers this year, we do believe that they will be profitable with the cattle that are currently in the feed lots today. The inventory they have is good inventory.

That's right. And that's very helpful. Just one last one on equity income. Butterball, are you beginning to see turkey prices begin to offset corn like we've seen in chicken? Or not yet? I have conflicting data in that regard.

I will tell you not completely, Pablo.

Okay. And moving on to another subject. Your pork processing number for the quarter, in that line item you don't include any equity income. That number was much better than I expected. And I'm just wondering here when you talk about the big opportunity on the processed meats side. I think you gave a number or something. Can you walk us through what you call processed meats, what percentage of EBIT is at that number with import processing? And roughly how much margins can improve there? Just some color to get a sense of the opportunity which is --

I can tell you how to do the math on that, Pablo. We've got between 2.5 and 3 billion pounds of processed meats. So every $0.01 of pound improvement in that equates to $30 million on a pretax basis. And so I have -- I have probably espousing through our organization. And I am attempting, you can tell I'm not making that. I would espouse that we're going to make $0.10 cents a pound on our processed meats business. We have not accomplished that or the number would be over $300 million. Each $0.01 I can improve those margins equates to $30 million on an operating profit line. The operating profit line. So that's the impact of this business. And that's why I've got such a focus. And I would tell you that this quarter was a very strong quarter for processed meats, still not at the $0.10 line.

Where are you right now on those $0.10 roughly?

We're around $0.07, Pablo.

Okay.

For the quarter. We didn't make nearly that for the year. We were more like $0.05 for the year. That's why I see the big potential in this business. There's another $0.05 a pound, and you can do $0.05 a pound on 3 billion pounds and the math is pretty big. That's going to take some time. I don't want anyone on this call to leave here and think I'm suddenly going to be producing $0.10 in the first quarter of next year, that takes a lot of time. We have to rationalize plants, we have to have strategic sourcing in terms of our costs, and we have to have more discipline and better -- we are investing in products to do this, but I think it's there.

What do you think would be reasonable to assume for '08 of those $0.05 opportunity, Larry? I mean roughly.

Say again.

What do you think will be reasonable to assume that you're going to achieve in '08 in terms of moving from $0.05 to $0.10 in '08, roughly?

That's a pure projection at this point. And I would tell you that along that grid, I'm going to move, but how far I can get there, I'm not going to make that prediction.

If I can, Pablo, let me give you a little bit of feel because someone could criticize us by saying, yeah you went out and paid a whole bunch of money and bought Armour Eckrich and Cooks and improved that $0.05. $0.04, $0.07, whatever the number may be because you acquired it. We do show good, solid impact from those new acquisitions that are impacting that line, that is absolutely true. However, what we would call our base business, the process meats that were available or were in our portfolio prior to Cooks and Armour Eckrich all showed improvements in this last fiscal year. So we had not only the addition and acquisitions we also had organic growth in margin, as well.

That's very helpful. And just one last one, Larry for me. In terms of hedging on the grain side, at Cagney, you said if corn stays at $4, it will be another year before we get to $50 raising costs for hogs. For the quarter, working with the assumption of 9 months, 12 months moving average on your cost for grains, I was coming out with raising cost of 43, you reported 46. So does that mean that your hedges were a lot shorter than the 9 to 12 months that we were led to believe? And related to that, are the hedging policies you used for hogs the same that you used at Butterball? Or that's totally different?

They're different at Butterball. Butterball is turkey. You can't do the hedging, you can only hedge the grains. We hedge the grains and to some degree the hog, as you guys probably know. The other thing, Pablo in terms of those raising costs, those also have the impact of circle virus in there. So those raising costs, by the fact we are delivering 7 or 8% less hogs have an impact on the overall raising costs. We've got the adverse impact of increased grain costs plus impact disease impact on our organization.

Right. Okay. But it's still fair to assume on the grain side, at least 9 month positions, roughly?

I'm not going to give an answer to that, Pablo.

Okay.

We do hedge grains, I told you before that we count our hedging strategy as part of the operating business. I would tell you to measure us on our effectiveness because sometimes our hedges work or don't work. And I'm not going to try to blame or credit the results based on our hedging activity, it's an integral part of our business.

Last one, this quarter there was nothing from mark to market hedging, right?

There was a -- I think there was a positive impact. But --

How much?

Pablo, again, I don't want to go into hedging. We've written it down one time. I will tell you it was positive. It was a significant -- I don't know if I'd use the word dramatic -- we will tell you we are at the end of the quarter in an adverse mark to market position. We're still in a negative position.

All right. Thank you.

What we want to do, is from a hedging standpoint tell you that we are not -- we're not going to use that as an excuse and we're not going to use that as a credit to the quarter. It is what it is.

Thank you.

Thanks, and we have a question then from the line with Alok Chopra with Oppenheimer. Please go ahead.

Yes, good morning. Could you discuss the components of international. Essentially from Q3 to Q4, your operating profit was down a lot. You had a good quarter, previous quarter. Is it possible to break out what were the components of the Q4 number?

Let me help you a little bit there. The third quarter, which is that November, December, January period has some seasonality into it, some beneficial seasonality. That's going to be the best quarter, at least on the Group Smithfield side of the business as well as in Poland, we have a pretty good goose business that we process and for the holiday season. The third quarter is going to be the best.

As well, we had--our Romanian operations started off strongly. We had a dip in terms of the livestock coming into the plant, just the way in which we had placed the animals a year ago. We had lesser numbers coming through Romania for the quarter which adversely affected Romania has nothing to do with the business. It has to do with the fact that the way in which we placed animals a year ago and those animals are back in place as we speak. It was just a dip in the production side that we knew was coming.

The Group Smithfield business is solid. We did have some, some modest year-end adjustments associated with the Group Smithfield business. But all in all, it was -- we had a very strong third quarter. I think we had a little bit weaker fourth quarter here and I think that you will see given market dynamics all things being equal, it will be better as we go forward. But we still got the market.

and I think that many of the same influences that typically if you look at Smithfield over a long period of time, our third quarter is typically stronger than our fourth quarter. And as far as processing is concerned probably 3 years out of 4. And I think the same influences will be there in terms of our business in Europe, as well. Okay. Well, one other question, Five Rivers you talked about the cattle raising business losing money and what will it take to turn this into a profit at some point other than grain costs coming down.

That's a big factor. We've got higher priced cattle as we speak, which is helping to offset some of that. And I would tell you that I think it's going to be a better -- I think it's going to be better. I think Five Rivers has gone through, all our cattle operations have gone through a tough period here. I think these have been some of the toughest years. I think they will be better.

Well, many of the cattle that we sold and impacted our profitability in this last year were bought in anticipation of much lower grain prices. And so we're -- had relatively high feeder cattle prices associated with them. You couldn't do anything about that. Once the animal was in the feed lot and you paid for that feeder animal, you had to pay whatever corn prices were. Maybe you had some hedges against it or not. But certainly feeder cattle prices have come down. That will be one factor. Higher market prices, that will be a second factor. And then corn then becomes the variable in between we have very little control over.

Some of the higher priced corn has already been factored into feeder cattle prices. As corn goes up, feeder cattle going into the feed lots come down almost one for one. When you go in as Bo was commenting, you go in with higher feeder cattle anticipating lower grain and then you feed it higher grains you sort of double down on your loss. So I think it will be much better going forward.

Okay. That's very helpful. Thank you very much.

Thanks, and we have a question now from the line of Eric Katzman with Deutsche Bank. Please go ahead.

Hello, everybody.

Morning.

Few questions here as follow-ups. Just something that seemed a little bit inconsistent in the press release was on international and Romania. I think you said Romania experienced only a modest loss due to lower volume levels as the business ramps up. How is lower volume levels consistent with a ramp-up in the business?

Just ask the -- I heard the first part I didn't hear the last part. Did you hear the last part, Bo?

As Larry described, we knew when we started the new plant up that we had several customers -- going back to seasonality, that in that part of the world December is a huge marketing month. They wanted us, our customers wanted us to pull hogs forward to market in December to meet their needs. We acquiesced, we did that, it meant that as we came into the fourth quarter, we were short hogs. We built those up and we are now reaching operating levels. We've gone from 8,000 head per week to 11,000 head per week. Continuing in the last thirty days to push that up. I think that you had was we were correctly describing the operating levels of the plant at the same time the overall program is ramping up to higher and higher levels. We were really responding to an issue that took place in the third quarter in light of the ramp-up of operations in Romania.

We were expecting in the coming fiscal year for us to process about 600,000 head in that Romanian plant. Now that plant can process as it stands today, nearly 2 million head a year. Even 600,000 this year is only 30% of capacity. In this past -- these past several months, we've been operating at far less than even that. Just as the hogs are growing some pull ahead and dip in production, we've been operating some weeks when we only had 7 or 8,000 head for the week because of a pull ahead feature Bo talked about and a dip in production. That is now back up into 10 and 11. By November that becomes 14,000 a week and this plant continues to move more and more and more towards a -- it will be quite some time, several years before this plant will ever see 2 million hogs.

When you put a sow in place today or you start construction, you're looking at a year and a half to two years before that animal comes to market. It's certainly no trade secret, but might not necessarily be appreciated by everyone on this call. Romania has as best as we can tell the highest meat market of any marketplace we deal in the world.

One thing you should take away from this, if you operate a meat processing plant in the United States at 30% of capacity, that's a recipe for bankruptcy. In Romania, if we operate a plant at 30% of capacity, we won't make a lot, but we believe that we won't lose much at that level. That's the difference in the profit opportunities in that part of the world that we can do well below the capacity of that plant as we build the herds in production. and the money in the short run will be made at the hog level, not the plant level.

That's correct.

Switch subjects. Thank you for that. Does the capital expenditure number that you quoted for '08 include anything on a new beef plant?

No it does not.

That would be incremental?

That would be incremental.

If you go forward with it.

It is not anticipating a beef plant.

Last question. Regarding the Premium Standard Farm acquisition, can you give some sense, I guess there was when you first announced it before the Department of Justice kind of delayed things, I think you had said it should be accretive and then kind of the view was maybe it was slightly dilutive after time had passed. Can you just kind of give us the sense as to what you think that business will be in fiscal '08? and then a little bit longer term, what incremental it could add?

I would tell you that that business if you look back across the historical numbers would be accretive. It could very well not be accretive in the coming year with the impact of grain prices on the hog side. And we're going into the very bad period on the hog production, which is a substantial part of that business. Well, you've -- the real issue will be that the way in which that acquisition differed than most in the past Smithfield has been handled is that the hog operations will be managed and wind up flowing through the management structure and P&L at Murphy Brown's and the hog production assets, as well, then the plants will flow through the individual IOC operations of both Farmland and Smithfield packing company. We won't necessarily be able to easily track what those groups of assets did. We can do it. But it won't pop out at you and I hope that that doesn't become a cause celeb in terms of trying to track that number. It'll be very difficult to put on a comparable basis going forward. But clearly I believe going into fiscal '08 the fresh meat/hog production side of this business may feel more pressure. We may not do as well to combine the hog production and fresh meat side of the business given the fact that we're probably not going to be able to pass on all the increased probably not going to be able to pass on all the increased grain costs. PSF is 100% integrated so we have to pass it all through.

And the reality is if our swine operations and our fresh meat plants do well, those facilities and assets will do well.

But that was a strategic purchase. It does secure us in the Midwest of the United States. They have two very good processing plants. Buying businesses that we know work for us over the long-term. I'm convinced this was a good acquisition. Someone asked me the time back when we wished we had held off with the grain prices. Still maybe we would have gotten a better price, but that so be it. The fact of the matter is this is a quote once in a lifetime opportunity for us to secure ourselves in the Midwest. It secures our vertical integration strategy in the Midwest and it was a very good acquisition. I'm very pleased with it.

Thank you I'll pass it on.

Thanks and our next question then comes from the line of Jonathan Feeney with Wachovia, please go ahead.

Hey, Jonathan.

Hi. You mentioned that Europe in the release, Larry is not nearly as profitable as it could be. Could you put more potential numbers around that? Where do you see this business in 2010?

2010?

Yes, 2010, let's go.

Well, let's just tell you this business, help me do the math here, Bo. Our Polish operations are about $800 million business, our Romanian business is a $100-ish million business, so round those and call it a billion. Our Group Smithfield business is a 1.7 or 8, we've got half of that. Our share, because -- and then we've got Campo Frio, which is about $1.4 billion company, which we've got 23% of that. You add all that together and we've got a $2 billion European business. I think our margins in Europe should be very solid margins. And so -- I don't like making predictions. As soon as you make them, they're wrong. This business should be delivering somewhere in that 5% range.

Okay. Thanks. And just one other follow-up --

They're all very good businesses.

Sure. You said in the release also that acquisitions, the two in the quarter were immediately accretive. Can you give us any insight into the math behind that and update on any targets you might have for the coming year for any targets you might have for the coming year for those acquisitions?

We bought the Armour Eckrich business and our projections, after pulling out the Butterball business that went into the joint venture was that we weren't convinced that the math worked. We've been able. We thought we'd be dilutive. We've been immediately able. We rationalized some plants almost instantly. And that business has popped up very nicely and is showing in the pork segment. The Cooks business we were not surprised at. We thought that was a business we could make work.

Obviously, the Group Smithfield piece is showing up in the international segment. You can see that that's working. We don't break out the individual operating companies, but I will tell you that they are--Cook's and Armour Eckrich are important to, although not the majority by any means, important to, although not the majority by any means, they are important to those pork numbers. That brings some stability to some of those pork numbers going forward.

and just finally a follow-up from an earlier question. Can you give us a sense Larry or Bo what hog price breakeven per hundredweight would be if you bought all your corn today on the spot market or say at an average price for the last 3 months.

We got some noise across this line as you started that question. What was the first part.

Some noise other than the question, you mean?

No there's a buzzing that periodically comes through this phone.

What was the hog prices.

It seems like it's going to blow the windows out. Ask the question one more time.

Yeah, what were the sort of spot hog price break even be if you bought all your corn on the spot market today?

$48, Bo you think?

It's a guess, but yes, I'd say that's pretty close.

Thanks, that's very helpful. Thank you.

Thank you. And we have a question then from the line of Tim Ramey with DA Davidson. Please go ahead.

Good afternoon to you.

Hate to think of the time difference you and us. We're going to bed, you're getting up.

Exactly. I don't think you mentioned whether the impairment charge related specifically to the Texas county plant. Would you care to comment what part of the beef operation took the impairment?

The impairments that we said, there's a -- there's an $8 million impairment in the beef business. The rest of -- into the impairments are in the processed meats side of the pork segment. Does that answer the question?

I think so. And just to follow-up on Jonathan's insightful question.

Can you speak a little bit louder, Tim?

Sure. Just to follow-up on Jonathan's question. If the current raising costs were $48, do you think your $47 selling cost was a relatively unhedge-affected number? Or -- if that's the case, sort of the spot market case for hog farming is slight losses right now.

I'm not sure I heard -- I couldn't hear your question in all honesty. If you could repeat it and perhaps talk a little bit louder into the phone. We're having difficulties here hearing.

Okay. I'll try. If the current spot raising cost is $48 and you said your selling cost was $47, maybe that selling cost was hedge affected, but if it wasn't hedge affected, sort of the run rate for the hog production business right now is a slight loss.

Well you -- you're asking about a historical sales value and a projected corn cost break even. So neither of those are necessarily the -- right now hog prices are higher than that and corn doesn't cost $4. So today hog prices -- hog margins are profitable.

And in fact, if you look at the futures market, it's quite profitable. We've got hogs well into the 50s well into the future, and corn, I would tell you that we've got some -- we've got some corn affected hedges in there. So I think less corn really shoots away from us. We don't have it all hedged, I don't think we're going to see necessarily $48 raising costs and I don't think we're going to see necessarily $48 sales price. You're right, today if we sold hogs bought hogs today with no hedges and we had to sell them against a $47 hog market, we probably would lose money. That's a fair statement.

And just one more. I won't go on too long. But the -- was there any kind of a currency benefit in the quarter? Or did that all sort of wash through?

We actually had currency losses that was part of the partial reasons why we had increases in corporate expense and SG&A.

Okay. Thank you very much.

You're welcome.

Thank you. And we have a question then from the line of Farha Aslam with Stephens,. Please go ahead.

Hi, good morning.

Good morning.

Larry, you'd mentioned you're spending time on that processed meats business. Could you tell us what the capacity utilization is in your processed meats plants in the US? and if you go back again to that 2010 number. Where you anticipate it to be. And do you think in 2010 you can get to that?

by 2010? Yes, I do. That's the goal. Whether I can do it or not. Do I think it's achievable? Of course I do. We've got we have some wide. And I thought for the year we were about 80% of plant utilization. And I'm trying to move that up another 10% to 90%.

And at 90%, will you be able to -- if you get that 90%, will you get to maybe closer to that $0.10

Oh, I will. I'm telling you that won't get us all the way there.

The $0.10 is going to come from two factors, it's going to come from lower cost structure and the other half is going to come from improved marketing and sales.

and other cost control -- and other cost controls even within the plants.

Okay. And then --

I think, Jerry, it's a little after 10:00. You want to try one more question?

Yes, I let it run a little longer since our presentation was longer than usual. Let's take one more question, please operator.

Certainly and our last question comes from the line of Michael Piken with Cleveland Research. Please go ahead.

Thanks for taking the question. Just wanted to touch on the export markets. Mexico's been down in the last couple months. And I just wanted to get kind of your overall outlook over the remainder of the year and in particular Mexico. And also if you could comment on Japan, as well which has been pretty strong over the last couple of months.

Mexico did have probably two, maybe three negative months in terms of year-over-year sales volume. Although you're comparing absolutely historic levels in the prior year to what we did this year. But that has come back very nicely in the past 60 days. So we remain optimistic about Mexico. We're trying to find ways, frankly of not just selling meat, commodity basis, but finding ways to add value to it and our processing operations there. Japan is continues to be a strong market for all of our domestic IOCs. But I would say that some of the most optimistic areas and regions that we think we have opportunities in are China and Russia. But principally China. There's been record amounts of pig meat sold and high prices. and we hope that the Chinese government doesn't burst everybody's bubble, but it looks as though it may be the darling of the export world for the next 12 months as far as pork is concerned.

Yeah. And are you benefiting from the hog disease issues over in China? Is that part of the reason that the demand has gone up there? and also if you could give sort of a overall number if you had to anticipate. Are we looking at a mid single digit increase you think for 2007 in terms of overall export volumes or double digit growth?

I'm not going to project on our -- there's so many issues that could affect that export issue. And we look at exports as accretive to our domestic market. So just because in any one given year our exports move up or down doesn't mean whether that's a good thing or a bad thing. If we can get better prices in the United States, the export market numbers will suffer because that's the smartest decision to make. In China, the demand and higher prices is I think just as reflective of perhaps some constraints in supply caused by disease. As the fact that it is probably the most robust overall growth economy in the world and you can't find a developing nation that as they spend more money, have more disposable income, they spend more money on food and as they spend more money on food, pork is a beneficiary of that.

Okay, and finally one last question. Overall for the entire industry, pork production volumes are up about 2% year-to-date. And your volumes the hog production side were down kind of mid single digit range. If the circle virus kind of you guys worked through those issues. What type of growth rate might we see in terms of overall production? Just trying to get a read around that.

You talking about for the industry?

Industry-wide it's up 2%. And that would be sort of --

I would say you're probably looking at 1 to 2%. I think people are still making money in spite of higher priced corn. Under normal conditions, you would think these corn levels would shut expansion down. But it hasn't. So there are a whole bunch of additional factors hitting that. So if I had a model, I'd plug 1 or 2% in and feel pretty confident.

Okay. Thank you very much.

Thank you.

Thanks very much, everyone. Thank you for joining us today. Have a good day.

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