Smithfield Foods Inc (SFD) 2010 Q3 法說會逐字稿

Thank you, ladies and gentlemen, for standing by. Welcome to the Smithfield Foods third quarter fiscal 2010.

At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Instructions will be given at that time. (Operator Instructions). As a reminder this conference is being recorded.

I will now turn the conference over to our host, Keira Ullrich. Please go ahead.

Good morning. Welcome to the conference call to discuss Smithfield Foods third quarter fiscal 2010 results.

We would like to caution you that in today's call there may be forward-looking statements within the meaning of the Federal Securities Laws. In light of the risks and uncertainties involved we encourage you to read the forward-looking information section of the Company's 10-K for fiscal year 2009. You can access the 10-K on our press release on our website at smithfieldfoods.com. On our call today are Larry Pope, President and Chief Executive Officer; Bo Manly, Chief Financial Officer; and Dick Poulson, Executive Vice President. This is Keira Ullrich, Director of Investor Relations.

In order to provide opportunity to as many analysts as possible to ask questions during the Q&A session later in our call we request that you only ask one question. If you have another question please get back not queue.

Larry Pope will begin our call this morning with a review of operations. Larry?

Thank you very much, Keira. Thank you, ladies and gentlemen, for joining the call.

I am pleased this morning to come before you announcing that Smithfield Foods has returned to profitability. It has been a very tough two years. For the third quarter we are reporting income from continuing operations of $37.3 million, or $0.22 a share compared with a loss of $108.1 million, or $0.75 a share last year in the third quarter. On a year-to-date basis we've got a $96.8 million loss, or $0.63 compared with a $169.7, or $1.21 loss in the first nine months of last year. I hope you took note of the fact that we outlined several nonrecurring items as part of the press release. They all net to zero but as we discuss those in the narrative, they are important for your understanding and so we provided the table to give you that understanding realizing that the top and the bottom are the same numbers, so as not to be confusing.

It looks like the cycle in hog production has turned. We have been through a long period of prolong losses in the live production side of the business. We have been talking about that for a long, long time. We are seeing a period on which our costs are going down and our hog prices are moving up. For the quarter as we indicated our average sales prices quarter-to-quarter are up for about $0.04 or $.05 and our raising costs were down $.10. That is very good for hog production, and we are showing comparative operating results of $55 million loss compared with $253 million in the third quarter of last year. So these are very good comparisons. However for the third quarter we were still not at break-even; $.44 plus the premium, we paid about $0.46 compared to $0.51.

We are still underwater in the third quarter in terms of raising costs being above sales price but it's sharply narrowed from the prior two-year period. And as we are in our fourth quarter many of you have seen that the hog market has continued to move up from the third quarter levels. And as of today we are profitable in our live production side of the business. I think you all know, in our hog raising we have made cuts in our sow herds. We have made more than a 13% reduction. That is flowing through. From that standpoint we think we have improved our operating environment there. The performance at the farms has been good. I think we've talked about that now for sometime. Many in the industry if not all us have had very good performance of the sows and the feed conversions and the livability.

However, I must tell you of recent, the corn crop came in and some of you probably heard about these [voma toxins] associated with some of this wet corn and these late to harvest. This is having an impact on our operations and I understand from conversations in the industry it is affecting other people in the industry. That has creeped into our cost at the end of the third quarter and is impacting our cost modestly in the fourth quarter. Mr. Manly will speak about that a little more fully in his comments, but I want to tell you it is there. We are taking some very stringent efforts to minimize that impact. We are buying a lot more local corn and we're doing a lot more blending, blending that corn in with others, in order to lessen the impact as much as we possibly can. However, I want to point out that that will be part of our cost analysis as we go into the fourth quarter and it will be probably be with us until this crop is fed out.

We are continuing to particularly evaluate our live production operations for cost improvements and we have some ideas and a plan that we are beginning to execute.. It's fairly detailed like our restructuring plan on the meat side that we think has a lot of promise. As many of you know in this business those kinds of things on the live production side don't happen quite as quickly as they do on the meat side and it will come out over a longer period of time. But I would tell that we have some thoughts and a pretty good plan that we think will make us much more competitive even on the live production side. The final note relative to the hog production deals with the pending decision that the EPA is evaluating relative to increasing the blending rate for ethanol. That decision as many of you know has been delayed and is likely something will be decided here probably in our fiscal first quarter of next year. I don't expect it to the fourth quarter, more likely into the first quarter of next year.

Anything there probably would adversely impact the corn markets going forward. We are aware of that. We have taken some protection there as you know we take advantage of the future's markets regularly to protect ourselves on the input side. I would tell you that we have taken some pretty good measures there so I am not so worried about that on the near-term basis. But the fact that the government would increase the blending rate from 10% to 15%, or something approaching that, is not good for the input side of this raising business. And while we can get some near-term protection, longer-term protection is not as easy. On the fresh meat side of the business, if you look at the operating profits you see they are down. However, there are restructuring charges in both of the years that you need to account for there. I am satisfied with our fresh pork operations and things are just fine there.

We have closed just after the end of the third fiscal quarter, the end of January, we did close the last plant in Smithfield, Virginia part of our restructuring. That is helping our fresh meat results already in the fourth quarter as a result of that merging of the two plants in Smithfield. I'm sure you have all seen by now that we have announced the closing of the Sioux City, Iowa plant, which was a very inefficient plant in the Smithfield system. I think we made some pretty open comments about that in the press release we made. It's a decision we have been evaluating for quite sometime and was part of the original Pork restructuring plan. Although we struck that realizing that the fresh pork was really pretty good and that we would continue to operate that plant as long as it made sense. As we move into tighter hog supplies and higher hog prices, the profitability on fresh pork will certainly be pressured over the near-term. And we made the decision that it was the appropriate time now to make the tough decision to close that plant and to substantially what we believe improve our fresh meat results by eliminating a significant amount of the commodity fresh pork that that plant has been producing and putting it into the open market. We are on schedule by the end of April that plant will be closed and we will be picking up production a bit in our other plants, but a fair amount of that production will cease to exist in the Smithfield system.

So from the fresh pork side, the results are okay and I think going to get significantly better as a result of two fairly significant changes; one that just happened and the other one that will happen in the fourth quarter. So I am encouraged as I look at the fresh meat business. You can't talk about fresh pork without talking about exports and I know all of you are interested about what is going on in the export markets. We have - - our export numbers are actually pretty good, and for the quarter we are about flat for the same quarter last year. I know a lot of people are talking about exports being down, from Smithfield's standpoint this is going to be our second best year ever in exports. And that's only, second only, to last year when we had some of the remainder of the carcasses that we shipped into China. And we are having our second best year in spite of the fact that the Chinese mainland market has been closed for the entire fiscal year.

Beyond that many of you know that the Russian market has been closed of recent. I am encouraged on both of those markets. They are both making the proper signal, sending the proper signals, and I think our trade representatives are doing a good job in attempting to get those markets back open. We are pretty active in that area, and I am optimistic on something in Russia even almost eminently, and I am optimistic that something in China will happen before the end of the fourth quarter. I think I made those comments in the press release. Clearly, I don't have the decision-making capacity to make that happen but I think the signals are correct, and I think that the momentum is there to get these markets back open. They do help fresh pork results. They are important to our fresh pork results given so much of this business that goes out of country these days. So given that combined with what I think we are doing on our two plant operations, only fresh pork is going forward pretty nicely.

Turning our attention to packaged meats, that's always the highlight of my discussion. We had another very good quarter in our packaged meats business. On a year-to-year basis it looks up about $30 million. Again, you have to account for restructuring charges largely and last year and on a year-to-year basis it's actually down a bit, just a touch. As I look at that business with the spike that occurred in the raw material input prices in the second half of the third quarter, I can't say anything but I am pleased, pleased as punch, with the job that these guys are doing on the packaged meat side of the business. The restructuring that the Company announced, the Pork restructuring, is essentially finished.

All of the plants have been closed and virtually all of the things that needed to be done have been accomplished, except we've got a little computer conversion with SAP in a couple of our operations that's going to be a little more drawn out into the summer. But that is all that is really left in the Pork restructuring. The actual shifting of all the operations has been accomplished on time and on budget. And George Richter and the Pork Group management teams have done an absolutely stellar job in the face of a very tough year combined with a massive fire in our Patrick Cudahy plant in Milwaukee, Wisconsin. They had to deal with those shifting of products at the very same time and they deserve some credit for a job well done. It is benefiting the quarter, not nearly to the extent of the $30 million a quarter we expect. On a quarter-to-quarter basis going forward we got about half of that this quarter. So we are still not at a run rate that is $125 million, however, we have nearly accomplished the $55 million in this fiscal year. We will clearly meet that number for the year, and we fully anticipate that the $125 million will be impacting in fiscal 2011. We should be getting the full benefits of that.

We did point out the fact that we've lost some volume in our processed meat side, that is true. This is the result of capacity constriction that we did, we reduced it on purpose. We closed a large hot dog and luncheon meat plant in Florida as well as we have continued to exercise sales discipline, all of the losses, or the vast majority of those were fully planned. We are not surprised by the 7% reduction. In fact we knew that was going to happen and I think we told you that well in advance that that would happen. I can report to you today that this business is very solid. We are feeling some pressure on margins as we move into the fourth quarter as these higher raw materials work their way through our costing system and prices have to adjust. As you know, we have relationships with customers that are formula-based in some case and as well just pricing. And when you have a sharp run up in raw material costs, the near-term effect can be downward pressure on your margins.

We are focused on this end of the business and I think it is well under control and so I continue to look forward to that as a very strong area. We are turning our attention going forward to the sales and marketing effort on that side of the business for top-line growth. We have gotten the bottom line. We have gotten our cost in line. We've gotten our capacities right sized and it's now time to pay attention to the top line. We told you a year ago we were not going to focus on that, we are now focused back on that. And there's a lot of opportunity on the sales and marketing side of this business and that's where this Company is beginning to turn their attention. Internationally the numbers look comparable. There is a $12 million charge in this years number for refinancing charges in our Campofrio operations. So from adjusting for that our business is very good.

Most of the numbers are up, Holden is doing excellent, and beyond that the international Hog operations, and we look at our international business more holistically from a vertically integrated basis. The hog raising business is doing terrific. That shows up in our Hog production numbers, not in our international numbers, and it is going gangbusters, I couldn't be more pleased. Because of the liquidation that has occurred both in Europe and in Mexico, those have resulted in sharply higher live hog prices. And we have seen those operations go from losses last year to very strong profits this year. And I am extremely pleased with what is going on, and our raising operations on the international side.

I'll turn it over to Bo who's got a complete report I think on the financial side, and then I'll give you my view looking forward after Bo's comments. Bo?

Thank you, Larry, and good morning, everybody.

It is extremely refreshing for me to announce that Smithfield recorded a profitable quarter. I believe we've reached the other side of the longest and deeper down cycle I've experienced in my 30 years in the meat industry. I have comfort that we are on the upside of the cycle.

The CapEx and one time expenses of restructuring are largely behind us and the benefits have begun to fall at the bottom line, particularly in packaged meats. The improvements made to the Smithfield, Virginia plant in the last quarter coupled with the closure of the Sioux City fresh meat plant in April, will improve the dynamics of our fresh meat business on the East Coast and Midwest. Our international meat businesses are profitable and improving. Our overseas Hog Production companies and joint ventures were solidly profitable. Butterball and turkey operations have reversed prior-year losses, and losses in domestic hog operations decreased significantly. But we are still in choppy water and however, as we look at forward markets it does appear that the wind is no longer in our face.

Before I get to the body of my comments I would like to first cover housekeeping issues for the quarter. Last year's third quarter contained 14 weeks impacting quarter-over-quarter volume comparisons by 7%. Pork Group restructuring charges in the quarter were $4 million and $85 million in the same quarter a year ago. The announced closure of our Sioux City, Iowa fresh meat plant resulted in a $13 million charge for the quarter. Finally, equity income and affiliates reflects a $12 million refinancing and other one-time charges flowing from Campofrio. Total Company sales decreased 14% for both the third quarter and nine months year-to-date compared to the same periods a year ago. The extra week in the third quarter of last year accounts for half of the quarterly sales decline and almost 20% of the nine month sales shortfall. When adjusted for the extra week, volume declined in both fresh pork and packaged meats for the quarter by 7%.

The nine month year-to-date packaged meats volume fell a similar 7%, while fresh pork volume declined 6% compared to the period a year ago. This reflects marginally less live animal availability and efforts to rationalize sales and forego lower margins in fresh meat and packaged meats business. International sales were up 3% for the quarter with lower prices driving a 19% volume increase. For the first nine months however, large negative currency changes reduced international sales by over $260 million. This offset a 14% volume increase and resulted in a net decline of 14% in sales compared to the same nine months a year ago. Quarterly and year-to-date tonnage increases were driven by gains at Animex in Poland.

Third party sales in Hog Production are beginning to reflect fewer pounds sold due to the trimming of our herds. Adjusted for the extra week, domestic tonnage was down 3% and 4% compared to the prior quarter and nine months, respectively. Declines in sales and the other segment reflect lower turkey output and sales of our remaining cattle inventory a year ago. Our consolidated third quarter operating profit was $97 million compared to a loss of $136 million a year ago and an improvement of $95 million compared to our second quarter. The year-over-year quarterly improvement of $232 million was driven by continued strong importance in the Pork Group and a $198 million turnaround in Hog Production. Hog Production results a year ago represented the low point in our Hog Production financial cycle.

Pork segment profits for the third quarter and first nine months show improvement of $23 million and $143 million, respectively. These results are before restructuring and 14th week adjustments. Restructuring and plant closure charges for the recent third quarter were $17 million and $85 million in Q3 of fiscal 2009. After restructuring, the Sioux City charges and the 14th week adjustment, Pork segment operating profits actually declined $29 million to an adjusted $170 million for the quarter and an increase of $99 million for the first nine months to an adjusted operating profit of $454 million. The decline in quarter-over-quarter profits in the Pork segment is due in large part to rising pig prices squeezing margins. While the profit decline is disappointing, we are very pleased that packaged meat margins were maintained at $0.18 per pound in the third quarter compared to an adjusted $.19 per pound in the third quarter a year ago.

International segment operating profits declined $1 million quarter-over-quarter, impacted by $12 million in Campofrio debt restructuring and discontinued operations charges, offsetting profits of $7 million and improved profitability in Animex. Year-over-year improved nine months performance was driven by Animex results. Absent charges in Campofrio, all international operations led by Animex performance were profitable except for Romania. However, overall integrated results in Romania to include farms were profitable. The $198 million quarter-over-quarter lower losses in Hog Production segment represents the combined improvement of live hog markets rising from $40 per hundredweight to $44, and a decrease in cost from $61 per hundredweight to $51. These costs are net of interest. Nine months year-to-date have declined from $61 per hundredweight a year ago to $54 this year. Year-over-year volume with a 14th week adjustment in the third quarter declined 3%, from 4.8 million head produced last year to 4.6 million head this year.

Our domestic Hog Production efficiencies have improved year-over-year as has overall efficiencies for the Swine Production industry. Our hog raising costs, particularly in the East Coast, will likely be negatively impacted in our upcoming fourth quarter by $0.01,or so due to poor grain quality in the Eastern corn belt. International swine operations in Poland, Romania and Mexico moved from a loss to solid profits with $98 million in improved profitability in the current nine months compared to a year ago. The other segment, improved operating profits, reflects improvement in turkey operations on a quarterly and year-to-date basis compared to the same periods a year ago and finally, the sell off of our cattle inventories. The corporate segment reflects greater performance compensation in the third quarter compared to the prior period. While nine months year-to-date results also reflect increased performance compensation but this was more than offset by significant gains in life insurance valuations compared to losses in valuations in the prior year.

SG&A expenses decreased $8 million in the third quarter of fiscal 2010 and $44 million for the nine months compared to the period a year ago. Expense improvements were driven by the impact of restructuring Romanian subsides, lower legal expenses, timing of marketing and promotional activities and the extra week. Interest expenses increased for the quarter and year-to-date are associated with our new borrowings. We estimate a full year fiscal 2010 interest expense of $265 million. Today the full year interest expense estimate for fiscal 2011 is $255 million. Our equity investments and affiliates demonstrated an improvement in the quarter just ended of $24 million compared to the same period a year ago. For nine months year-to-date the improvement totaled $72 million.

With the exception of the impact of charges within Campofrio mentioned earlier, all investments, Butterball, Campofrio, and our two Mexican joint ventures, were profitable and showed improved performance for the quarter and year-to-date compared to prior periods a year ago. Depreciation and amortization for the quarter just ended totaled $58 million and $178 million for the nine months. This compares to $70 million and $207 million in the same periods a year ago. Depreciation was down for prior periods due to historically low capital expenditures rates in the last two years, as well as write-offs of assets associated with Pork Group restructuring and farm closures. We project full year depreciation for both fiscal 2010 and 2011 to be $240 million each year. We continue to maintain a high level of discipline around capital expenditures with total spending of $38 million for the quarter just ended and $136 million for the nine months ended in January.

With projects already in the pipeline we continue to anticipate CapEx for the fiscal year to fall below $200 million, equivalent to spending last year and well below current depreciation levels. We expect capital expenditures to move to levels equivalent with depreciation in the coming fiscal year as more normal earning levels are achieved. Our effective tax rate for the third quarter was a negative 27% and we project a positive 48% for the full year. For a nonaccountant dressed as a CFO, and please, no one comment that the emperor has no clothes, to get back money from Uncle Sam when you've recorded a profit is hard to get my arms around. But suffice it to say, that favorable tax treatment on foreign income, catch-up timing and true-ups from prior tax periods can result in a negative tax rate in a quarter with a low level of profitability within a full year period of loss.

Smithfield expended a great deal of time and energy during the past 18 months strengthening our balance sheet. Our goal is to continue to reduce debt. Debt net of cash at the end of the third quarter stood at $2.602 billion, down $185 million since the beginning of the fiscal year as well as a reduction of $1.224 billion net of cash since the beginning of fiscal 2009. Our debt-to-capitalization ratio at quarter end remained at 51%, steady with the end of the second quarter but down from 53% at the beginning of the fiscal year. Net of cash our debt-to-capitalization ratio at the end of the third quarter remained flat with Q2 at 47%, but down for the last nine months from 52%.

Liquidity remains strong throughout the quarter, available cash and AVL facility drawing capabilities were $1.53 billion at quarter end. Total liquidity declined during the quarter $160 million mostly due to seasonal decreases and borrowing base calculations. We remain very aware and respectful that we are carrying expense of cash from our earlier equity offering as an insurance policy against the vagaries in the earnings of our Hog Production segment. Now that we see light at the end of the tunnel we can begin to turn our available cash to better uses to include more normal CapEx spending levels and potential retirement of bonds, if opportunistic priced. Hedging activities during the quarter resulted in a loss of $9 million principally associated with grain position.

The Pork Group continues to evaluate the claim associated with the fire in July at the Patrick Cudahy facility. We are working closely with our group of carriers and are confident we will successfully resolve the claim on terms fair to the Company. We continue to provide seamless service to our customers through available capacity at other facilities albeit with some level of added cost and less than full efficiency. No direct loss from the fire nor gains from insurance proceeds have impacted our results. At quarter end outstanding shares remain at 165,835,632 shares.

In closing, I would like to recap that we have completed our financial restructuring. We are in the final stage of our Pork restructuring and the benefits are hitting the bottom line. We are now looking for more marketing opportunities to grow our top line. We have downsized our domestic swine production business and are looking at ways to reduce costs and improve efficiencies. Our Butterball turkey operations has moved from losses to profits. Our international operations; packaged meats, fresh meats, and swine production demonstrates solid performance and profits as well. We have a lot more work to do in many areas but our past labors are beginning to bear fruit. I thank you very much for your time and attention and now back to Larry. Thank you.

Thank you, Bo. I hope you took note of that. Bo gave you an awful lot of information there. I know many of you are interested in some of the numbers to fill in your models and I think we try to provide as much of that as we possibly can.

Looking forward, clearly I'm more optimistic than I have been in a very long time. As Bo indicated, we have been through a lot of struggles. We have made tough decisions in our Hog Production operation which we are continuing to make more even as we speak. We have made tough decisions relative to plant closings that needed to be done. Those have been accomplished and accomplished successfully. So I feel like that looking forward we don't have nearly the mountain to climb that we had in the past. We are experiencing some near-term impact of this inferior corn on our hog raising operations and I believe that our fourth quarter profitability in hog raising will not as strong as I thought it might have been.

Additionally, the cost shift that is associated with this higher priced meat is moving through our processing business and prices will adjust. I'm not concerned about that. It's just the timing of when those adjustments occur. Fundamentally we have a very sharply improved operating cost environment in this Company. In every area of this business except borrowing costs our cost structure is improved and continuing to improve. As Bo said, we are not finished. We fully expect to drive significant cost out of our raising operations even going forward. However, that will not happen in a 12 month period. That will take several years due to the life cycle of the construction issues associated with changing livestock raising operations. I believe that we've weathered these tough years, two tough years, and we are a better Company as a result of it.

Our discipline relative to capital spending, debt repayment have both improved our liquidity and leverage ratios to the best levels in many years. We are focused on right-sizing our operation. We have for a number of years focused on our packaged meats business and have fine-tuning our operations overseas by stopping the growth curve as we saw this wind coming. We are now benefiting from that stopping and fine-tuning those costs which are showing up at the bottom line in our overseas operations. I believe as these markets return to more historical levels that this Company is well positioned to deliver some very strong earnings going forward.

I think you saw in my final comments I made on the outlook in the press release how I am optimistic and I how I believe that this is going to benefit us, all of us, going forward. We do need a little market help here from this. We don't need the ethanol thing to blow up and cause the raising cost on the Hog Production side to go against us. But outside of that the management team of this Company, and that's not speaking of me, that is speaking of the people who drive this business every day has done a yeoman's job. And I am extremely pleased with this management team in every area, from our corporate people to our IOC's to our international operating people. They have had their nose to the grindstone and they have paid the price. And, hopefully, we are now about to see the real benefits.

With that, Keira, we will be glad to take any questions anybody might have.

Thank you, Larry. Operator, please open the line for questions.

(Operator Instructions).

First question comes from the line of Christina Mcglone, Deutsche Bank. Please go ahead.

Thank you. Good morning.

Good morning.

Larry, I wanted to get your opinion on demand for pork now that pork prices has risen so much and the dollar strengthened a bit. Are you still seeing strong demand out there?

I assume you mean in the case of that, I'm not sure whether you are talk about international and export demand, or whether you are talking about domestic.

Everything. Domestic and international, overall.

I would tell you that I think demand on the domestic side is flat. Clearly when you see these prices shoot up like they have in the last not even 45 days, less than that, 30 days, there are impacts in terms of how you get features back. And I think I would tell you the food service demand and pricing has about gone flat on us. So the downward decline has stopped. So I would tell you that pork is still in my mind a very cheap commodity, particularly things like pork loins where we have seen the export demand in Japan, which is a big market, has fallen off pretty significantly. And that has put a lot of port loins back in the US market. So pork is really pretty cheap in this country and so demand still solid there. It really has never fallen all that much.

On the export market, I think the inverse is happening, it has gone up and the dollar. We are seeing some resistance on the export markets. These particularly, some of the things that we sell like hams, hams have moved up very sharply. And you are seeing some of our markets overseas who are resisting, or outside the US, Mexico is a big market, so that's not really overseas. But those export markets are resisting some of those higher prices. And so I think, and I think I predicted this two years ago is that what will happen is that the meat will move up. And the first markets that will see the impact will be the export markets because we won't be as competitive. With that being said, pork is high priced everywhere. It's not cheap in Europe either. So when these customers overseas look for a source of imports, they've got to look somewhere, and pork in Europe is higher than it is in the United States. So we are still priced competitive, just not as competitive.

Okay. Thank you for that.

And then can you go over your comments on packaged meats again. I was confused. I think, obviously, there is going to be pressure on margins because of the pork prices going up but then you said you've already kind of addressed it, or - - should we see a sequential fall? I just wanted to get your view again on packaged meat margins.

I think that we could see some decline in the packaged meats margins in this fourth quarter. Let me say again, what I've said to you guys last summer and fall, and I think Mr. Manly reiterated that, we had a target in this Company of making $0.10 a pound. We are far in excess of that $0.10 a pound. And these levels that we are seeing even at $0.10 are far beyond what we dreamed of four years ago. I told you that these margins would decline once these meat prices moved back up.

I don't expect ,as Bo indicated, we've got margins in the $0.18 a pound operating profit level. I can't expect when these hams move back up in bellies and trimmings, move back up significantly. I don't expect them to stay in that $0.18, not if the fourth quarter and not going forward. What I do expect, Hog Production is going to be more profitable. Our fresh pork business is going to be solid and our packaged meats business will probably move, I think we will easily (that's a confident statement to say) maintain our $0.10 and well above our $0.10, but I don't think we will maintain $0.18 fourth quarter or next fiscal year. Bo, do you have any comment to that?

I'd like to say that really the opportunity for us now is more to try to grow the top line Larry, albeit perhaps at a profit level below that $0.18. I think that is really where we'll drive absolutely the bottom line is by selling more pounds as we come out of the restructuring with a leaner, meaner operating platform.

From a Company standpoint this is the bigger statement. What I've told our organization is calendar year 2009 was a restructuring year. Calendar year 2010, I'm looking at calendar years, is when we are tweaking the model. That's when we are closing the final plants, we're shutting down Sioux City, we're adjusting our operations to get the cost finally out of all of this, and get the benefits of the 125.

At the same time we are putting in place the marketing plan so that we are ready and beginning to roll out marketing. You won't see the real benefit of that until calendar year 2011, but I assure you we are already on it. It takes time to get those things into place and get those plans developed and out into the customer, into the marketplace effectively. So that is the way I think; 2009 was restructuring, 2010 is tweaking and you may see some margins. You may see a little bit of margin erosion on the processed meats side. But as Bo said, and our organization knows clearly, we are going to top line growth now. And we are changing some things even in the way of compensation to account for the fact that this is going to move. We are going to focus on top line, not giving up the bottom line, but we know we've got to hit the top line. We know that.

And we also know that we should have some benefits coming to us as we work through the Patrick Cudahy issues in this coming year. The tremendous fall off in activity there, but plans are to come back strong.

Great. Thank you very much.

Question comes from the line of Ken Goldman, JPMorgan. Please go ahead.

Good morning. Larry, given where hog and corn prices and futures are today, and given your hedging situation, whatever that is, would you be disappointed if you earn less than $2 next year?

(Laughter) Would I be disappointed? Mr. Poulson, that sounded like a prediction.

That sounded a lot like a projection, Ken. (More laughter).

Ken, gave you his projection, what is yours? (More laughter).

Ken, I guess I would tell you that I think - - the answer for you from me is, yes, I would be. Now whether I will make that l will tell you I have lofty goals in life. So I am oftentimes disappointed in the world. But I think you are certainly in the right ballpark. As I look at it, I swear - - we have to be careful here because these markets move a lot, fast, as they have changed. My goodness gracious, the cash market has moved so fast on hogs in the last 30 days, I'm still trying to keep up. So don't take that as a $2 projection as a prediction, but I think we have good times in front of us. The numbers we look at today look good.

And on voma toxin, very quickly, you talked about the negatives but there's a positive as well in that you get lighter hogs and less pork and higher hog prices across the board. You talked about I think you said a penny in cost. But isn't it going to be a bigger benefit overall, or am I thinking about that the wrong way?

I think it's easy to figure the cost, I think it's harder to define the benefit.

I agree with you. You are right in terms of your analysis. There should be less tonnage of fresh pork coming to the market and that is always beneficial. I think we are in a market that is more driven by supplies today than it is demand in terms of the balance of margins. I think the other thing we haven't mentioned here is we have probably the best freezer situation we ever had than I can remember a long, long time. Chicken is down, beef is down, pork is down. We have very, very low levels of bellies, very, very low levels of hams and that will be supportive as we move forward into this year.

Thanks, gentlemen.

Question comes from the line of Vincent Andrews, Morgan Stanley. Please go ahead.

Good morning. This is actually Greg VanWinkle stepping in for Vincent today. You highlighted in your prepared comments that the lean hog (inaudible) made a pretty good run. At the same time the south waters dropped off pretty substantially in the last month or two of data. And breeding herd productivity seems to be pretty good. So it seems like the status indicating that the herd contraction is not going to be quite as large as a lot of people initially thought it needed to be. I just wanted to get your take on where you think we are from a herd contraction supply and demand standpoint? And how concerned you are about the sustainability of the hog curve.

I would tell you, and Bo can have his own thoughts, the liquidation, we have not had as much liquidity as I would have hoped we would have had. I think I've been saying that now for a long time. I still think we need more liquidation. But I will tell you the other side of that, I think liquidation stopped. I don't know, Bo unless you know something, I don't know of any significant liquidation going on. I'm not sure if nothings going on before but I don't know of any going on today. So I wish we still had some more liquidation going on.

But the other side is we've had extraordinarily good performance and there is some perks out there. That has heated up in some areas. We are not experiencing much of that but there are people who are experiencing that. We have had extraordinarily good performance out there in the herds across this industry. At some point there's going to be disruptions in the performance of these animals. But we have had very good numbers. So that could have the same impact as liquidation. This voma toxin issue that we just talked can have the same impact as liquidation. So I think it's hard to predict. These are long cycles, but I think that the hog cycle is going to be okay for a while now.

Bo?

I think as you pointed out, all indications are that there has been slowdown in sow slaughter, perhaps indicating a movement away from hard liquidations. But I would coach you to look more closely at the slaughter rate as a percentage of the sow inventory rather than absolute numbers compared to last year. I think it is going to be much more relevant as we move into the new territory of highly productive sows, different operating configurations to look at the sow slaughter, not compared to a year ago or five years ago, but what is it compared to our sow herd, to look at reflections of increases or decreases in productive capacity.

Okay. Thanks a lot, guys.

The question comes from the line of Farha Aslam, Stephens, Inc. Please go ahead.

Hi. Good morning. Larry, with all the changes you are making with your hog operations, could you, and pork operations, could you share with us volume expectations? Particularly, what you are thinking for the fourth quarter and for 2011 for your fresh pork, your packaged meats and your hog operations?

Well I don't know that I have those numbers. But what I would tell you is that, let me help you with a couple of numbers, Bo. Maybe we'll just hold that for five minutes and see if Bo can do some back of the envelope calculations. What I do know is that we're killing 12,000 to 13,000 hogs in Sioux City. We'll be doing that all the way through the quarter. So that's not going to have any impact on the fresh pork.

Hog volumes for the rest of the fiscal year. That's going to have the impact starting next fiscal year when there is going to be 13,000 less. But I think we'll pick up some of that in our other operations. But I think 8,000 or 9,000 or 10,000 of those a day will disappear from our operations and that represents about 8% of our, 8% of the hogs will be down. That's for also the fresh pork side. We are down on the processed meats side, but I think that we will grow the processed meats next year over our current run rate which is the 7% down. That is not the same end of the year but over our fourth quarter run rate I think we will recover. We will recover some of that. So you take the fourth quarter run rate, improve that by 2% or 3% or 4% next year, I think that's where we will be. Does that help you?

Yes. And then just one follow-up on your - - You gave us the margins per pound on your fresh meats. Could you give us the same thing - - I'm sorry, for packaged meats. Can you do the same thing for fresh meats?

We don't think about fresh meats in terms of cents per pound. We think about her head. So I think you can do - - it's not very complicated. You can do fourth grade math here. We kill 30 million hogs, which is 7.5 million a quarter. Real simple if you look at the $7.5 million in the quarter for operating profits, divide that by 7.5 million, you get a dollar a head. That's the real simple math. Now you have to add back $14 million of restructuring which is the announced closing of the Sioux City plant and recalculate about $22 million or approximately $3 a head.

Okay. That's helpful. Thank you.

You're welcome.

The next question comes from the line of Christine Mccracken, Cleveland Research. Please go ahead.

Good morning.

Hi, Christine.

Larry, you talked about the increases we have seen in pork values here that cut outs gone up pretty sharply over the last several weeks. I'm wondering - - we haven't really seen it show up at the retail shelf. I'm wondering have you had conversations with retailers? And what/when might we see this increase show up to consumers and therefore be able to gauge demand?

I'll tell you, Christine. I think that the retailers have done very well on pork for a long time here now. I don't think retailers have to change. I think margins may decline a bit here. I'm not going to talk about any customers on this phone because they are all good customers, but I have seen some retail pricing. There is some nice margins in there for retail, let's just say that. So when this moves up I think you are going to see retailer margins squeezed a bit. And I still don't think you are going to see a lot of retail price changes to the consumer. I still think the consumer won't see that for a good while. As I say, I think that you are going to see some of the export market, export opportunities fall first and ultimately, when we have this meat, we've got that short fall, it will go to retail. But I think we are still a good ways away from that, Christine.

Don't you think, Larry, I mean if you listen to the retailers conversations around price deflation, obviously they are trying to fight that. I think they would be pretty quick to pick up on higher cost pork as a way to kind of push that top line.

You mean from their side.

Yes. I find it hard to believe that they are willing to sacrifice margin completely given - - are they covered? Is it that you've sold forward a lot of product?

You know this industry does not do long-term forwards, you know that. So it's not that issue at all. But there is still a lot of meat out there, Christine. And I think some of the meat is not being sold. The most obvious example there is pork loins. Pork loin pricing is nowhere near where it needs to be from my side because we don't have the Japanese business as the ultimate market. We do anticipate Japan picking up later in this calendar year. We expect that to pick up and that would impact the pork loin market. But that item today is still cheap even as this cut our is moved up, pork loins have not moved out proportionately with these hogs. They are still cheap.

All right I'll leave it there. Thanks.

The next question comes from Akshay Jagdale, Keybanc. Please go ahead.

Good morning.

Good morning.

Larry, can you just talk a little bit about packaged meats? What is the normal profit level that you expect going forward if it's not $0.10? And what has changed fundamentally in your business since you gave that guidance for $0.10 that now it is more profitable? Can you give us a little bit more insights into that?

Yes. When you have real cheap raw material when you have $30 hogs and $40 hogs, that ends up with very cheap hams and very cheap bellies. You can make some money selling it as a hot dog, bacon and hams. So we made extraordinarily good margins. With that being said, I think we have had a focus in this Company. I continue to say that, I've been saying that for several years, that this organization has changed the mind-set. We are disciplined from a sales standpoint.

I think George and the Pork Groups team has done an extraordinarily good job of getting their cost structures down. So some of that benefit is not just pure raising prices. We just can't go out there and raise prices, we've got to drive our costs down. And they have done a great job. What I would say is its our manufacturing side that is restructuring the capacity, it's our strategic sourcing of buying our input materials for the product manufacturer. These guys have done an extraordinarily good job. It's driven our cost down, which got margins up, then we cut off, I think Bo made reference to that. We've cut off some low margin business, it's hurt our sales volume. We are down 7%.

We want to wait for unprofitable business, that brings the rest of the business average up. Now, with that being said, I'm not satisfied with losing 7% or 8% of all the volume. We want to be a Company on the growth side. We've got to now market that. So I think maybe I underestimated the potential that we have from a cost savings and a sales discipline in the numbers it turned out, turned out much better than I thought. However, do not plan on $0.18 and $0.19 a pound going forward in packaged meats. Do not count on that. They will be lower than that unless I'm once again surprised. They will come down. You agree, Bo?

Okay. Is there a number we should look at if it's not $0.18 and it's not $0.10? Is it somewhere just in the middle? Is that a fair assumption?

I would tell you, It's north of $0.10 and my number that I would tell you to think about is like $0.12 to $0.13.

Okay. And just on the hog production business, you've talked about the cycle turning. But I believe on the last conference call you had said that you don't expect an adequate, when I say adequate return, about $15 a head on this business at least for the next few years. Has your view changed? What is an adequate return? I'm getting to $15 a head based on a 10% return on your capital invested there. But what is a normal or adequate return on that business? And when do you think you will be able to get there given the supply and demand dynamics that we see today?

You are asking some questions that are way more specific than frankly we would give you. I think in your estimation in terms of where the historical and numbers and normalized numbers are for the business, we are in that $10 to $50 range. When we're going to get there, there's a whole bunch of dynamics that I find very difficult to give you a prediction on that. Going back to some questions that were asked earlier, we are looking as we look at next year, we've got about a 3% increase in tonnage in our packaged meats in our model. We are looking at about a 2.5% decline in slaughter volumes and about a 5% decline in our Hog Production volumes. I hope that satisfies some of your questions.

Operator, we'll take the next question.

Next question will come from the line of Robert Moskow, Credit Suisse. Please go ahead.

All right. Thank you. And congratulations on a good quarter.

I want to know a couple more details about your growth plans, Larry. You've done a great job in rationalizing the business and improving the profitability of packaged meats but how do you grow packaged meats? It used to be you put a lot of CapEx into precooked items, and then I think that improved the value add. But are you going to bid more aggressively for new business with new customers? Is it more business with existing customers? Is it just leveraging some brands like Armour and Eckrich that maybe were under leveraged before. Can you give us kind of a little bit of a roadmap there?

I would tell you that's more than a five-minute discussion there. I can show you our marketing plan and you wouldn't get through it in a half a day. The fact is that we have taken, we have taken a strong look at our brands and we have taken those 100 brands and we have rationalized out what we are going to spend margin dollars to make those brands - - those brands attract consumers. So that when people go into the store, they go in to buy our product, not just buy a pound of bacon, but buy our bacon. Not just to buy a ham, buy our ham. Beyond that is we'll work with our customers, our retail and food service, because we oftentimes forget about food service. Food service is a big piece of this business and part of our growth. It is to convince these retailers that our products is better than - - carrying our product is better than a private label of somebody else's.

Sell the regional value of our regional brands which are extremely good brands in regions of this country. So I think that we have support those with marketing plans that support the retailers that allow them to make more money as a result of that. I think we have a host of options. Now there again, these things take time and that's why I'm telling you that is a little bit in the future, not today. But I think that we will have just as we've had with the Pork Group, I think we have a solid plan that is coming together and I think ultimately we've got to take market share from somebody else. Or either we have to convince the consumer to buy more pork and we've got to do both of those to be profitable. Our one position we're taking is that if we're going to take on new business, it's going to be profitable business. We are not going to take on a loss-leading business.

You've talked before about your vision of becoming known as a branded meat processor akin to the Oscar Meyers of the world. What kind of investment are you planning on making in the coming months? Do you need to spend more on people, market research? Do you have to hirer branded expertise in order to do this?

I don't think you are going to see us - - I've told people this is going to be an evolution, not a revolution. You are not going to see us go out and wholesale add a big marketing staff to this organization. That's the way to throw away big money fast. We are not going to do that.

I think we have, as we've looked through this organization and we've put together - - the sales organization is coordinated. We've got a lot of talent and we have a lot of cooperative efforts going on now. And again this is an evolution. So I don't think you are going to see a big blast evolve here. You are just going to see just as we said with the processed meats three years ago. I told you we had a focus in the packaged meats business, we would move it. I'm telling you we have a focus on the top line. This will be an evolutionary process. Hopefully, in the next two years I'm talking about it, it's a topline growth that's occurring.

Thank you very much.

Your welcome.

Thank you. Next question comes from the line of Ken Zaslow, BMO Capital Markets. Please go ahead. Mr. Zaslow, your line is open.

Can you hear me?

Yes.

Good morning, everyone.

Good morning.

Through all the years, one question I've never asked. What is the maximum amount of hogs Smithfield can sell forward?

What kind of question is that. I'm not sure - - You mean what kind of futures position could we take on live hogs?

I wonder if there might be a limit to - - could you sell all your hogs forward? Can you only sell - - I didn't know what the limits are. I never thought about it. But I was just thinking about it the other day.

I think, Ken, in reality you've probably got somewhere around a four to six month window of which there is sufficient liquidity. Not necessarily that there are restrictions but there is a sufficient liquidity to go out much further than six months in terms of an actual position. You might be able to find people that could do some strange derivative contracts. But using conventional methods, you are really limited to four to six months worth of forward hedges.

Earlier one of the questionnaires asked - - said that - - asked about the liquidation. You said it was a little bit less that they expected. What do you think the key drivers in the hog prices are and are those drivers set to continue?

I think key drivers as I mentioned before, I don't think there's as much demand as it is supply. And I think that the stage is set with some marginal amounts of production coming through the system from a live animal perspective. I think USDA would project we're going to be down 2% to 3%. We also continue to get benefits by fewer Canadian hogs laying - - overhanging our system, as well as fewer hogs in Mexico as well. So North America's going to have less meat available to it. And we have the best position as mentioned before in the freezers that we've ever had. So chicken production and supplies are down. Beef supplies and inventories are down. That all bodes well for us.

Okay. And my last question is China reopening, does that change the gross or net exports to Asia just, would that really change any of the dynamics? Russia might. The opening of China would that do anything? It seems like 80% or 90% of the pork has gone through Hong Kong. Just your perspective on the materiality of China reopening.

The only and I'll be quick with that. It still represents a net increase opportunity there because of the muscle cuts that could go through the mainland. So, yes, it does represent an opportunity.

Thank you very much.

Operator, we are going to have to end the call here. And I'm going to turn it back over to Larry who will make some closing remarks.

Thank you. Thank you, Keira. Thank you, again. It's refreshing as Bo said, it makes you feel good to finally be out of talking about losses and talk about profits and talk about the future and talk about the opportunities going forward. This has been a struggle period for many of you who have watched us work through these many changes that we have tried to effect. I am pleased with this organization. They have done a good job. I am pleased with where we are at.

We do see our focus beginning to shift towards the top line instead of the bottom line and we are continuing to focus on our live production operations which we've still got some opportunities there that we need to mind. I am optimistic the recession is coming, is reversing and some of the demand will be coming back. We see some nice opportunities overseas as these markets open up for us, but they have to open. The only negative is this EPA decision relative to ethanol that could certainly throw a monkey wrench in all of this costing process. And we are keeping a close eye into that and hopefully smarter minds and the science will dictate, but I don't know. With that being said I think we have a good future, a bright future and I'm optimistic, very optimistic, about where we are positioned going forward. Thank you very much.

Thank you, everyone.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T executive teleconference. You may now disconnect.