Smithfield Foods Inc (SFD) 2010 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 participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. If you should require assistance during the call, please press star then zero. As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Ms. Keira Ullrich. Please go ahead.

Thank you. Good morning. Welcome to the conference call to discuss Smithfield Foods fiscal 2010 fourth quarter and full year results. We would like to caution you that in today's call, there may be forward-looking statements within the meaning of federal securities laws. In light of the risks 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 and our press release on our website at Smithfield foods.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. Bo will begin our call this morning with a review of the Company's financial results, followed by Larry, who will provide a review of operations. Then the line will be opened for questions. Bo, go ahead, please.

Thank you, Keira, good morning, ladies and gentlemen. The last two years have been Smithfield's most challenging period. The Company survived this stress test from multiple fronts. We met each of these challenges, reacted quickly and emerged a stronger, more balanced Company.

The net loss in the fourth quarter was $4.6 million or a loss of $0.03 per share, compared to a loss of $81.2 million or a loss of $0.57 per share in the same quarter a year ago. For the full fiscal year 2010, our loss was $101.4 million, a loss of $0.65 per share, a reduction of 49%, compared to the loss a year ago. Our Pork Group posted another record year in our packaged meats business, having completed all of the elements of the Pork Group restructuring plan on schedule, on budget, and achieved our targeted cost savings and annual profit improvement goals. Having finished the Pork Group restructuring plan, we've embarked on a multi-year program to improve the competitiveness of our Hog Production group as well. This program will address a broad spectrum of cost, which benefits will take effect over several years. This initiative resulted in a charge to fiscal 2010 Hog Production operating profits of $9 million.

The Hog Production cycle has finally turned. Live production is profitable. Our fourth quarter Hog Production segment results do not yet fully reflect the improved Hog live prices, due in part to losses on live Hog hedges closed in the quarter, and mark-to-market losses on open derivatives used to hedge Hogs to be marketed in the first and second quarters of fiscal 2011. The mark-to-market impact on the fourth quarter results of the Hog Production group was a loss of $58 million, reflecting a sharp spike in futures prices in April, just prior to quarter end. This market upturn has largely retreated since the end of the fiscal year.

In addition to mark-to-market losses of $58 million in the Hog Production group at quarter end, the Company had additional mark-to-market losses of $15 million, principally attributed to fixed price forward purchase of hogs from independent producers, impacting the results of the Pork Group. Together, these items combine to impact the quarter with a total mark-to-market loss of $73 million. We had three significant items during the fourth quarter to include the $73 million mark-to-market derivative losses, $13 million in charges attributed to the Hog Production group cost savings initiative and a final piece of the Pork Group restructuring charges.

And finally, an effective tax rate above earlier guidance. On an aftertax basis, these items would adjust GAAP EPS from a negative $0.03 to a positive $0.18. Sales in the fourth quarter increased 2% compared to a year ago. For the full year, fiscal 2010 sales declined 10% versus the same period a year ago, due to the effect of an extra week in fiscal 2009, combined with lower average unit selling prices, currency fluctuations and planned volume reductions resulting from the Pork Group restructuring plan. For the most recent quarter, all major areas of the business with the exception of fresh Pork demonstrated sales increases.

The tide has turned from an operating standpoint. We are reporting our second straight quarter of operating profit after a protracted period of losses, driven by an industry oversupply of live Hogs resulting in low Hog prices. Highlights in the operating profits include record results in packaged meats for the year, increasing 52% year-over-year, reflecting organizational improvements and lower overhead and raw material costs. Hog Production results for the fourth quarter show an operating loss of $76 million, compared to a loss of $171 million in the same quarter last year, an improvement of $95 million year-over-year. Please remember, these results include mark-to-market adjustments outlined earlier. They also include $9 million in charges related to the new HPG cost savings initiatives.

Clearly, there has been a real improvement in live production. In each of the other segments, with the exception of annual fresh Pork, we are reporting meaningful improvements in operating results, compared to the prior year quarter and full year. The swine production environment has changed greatly in the past year. Live Hog prices in the recent fourth quarter were $52 per 100 weight compared to $43 a year ago. Fiscal 2010 full year live Hog prices averaged $44 per hundredweight compared to $48 last year. Quarterly raising costs for this year's fourth quarter were $53 per hundredweight compared to $62 a year ago. We marketed 4.3 million head domestically in the fourth quarter of this year, down 3.9% from the prior year quarter. The fiscal 2010 full year sales were 17.4 million head, down 6.5 million from the prior year.

SG&A declined 25% in the fourth quarter, and $92 million or 12% for the full fiscal year. These reductions are due to changes in salaries, FX, and lower overhead in the restructured Pork Group. Depreciation and amortization for the fourth quarter and full fiscal year totaled $63 million and $237 million respectively. Full year depreciation for fiscal 2011 is expected to decline year-over-year to $232 million. We continue to maintain a high level of discipline around capital expenditures. CapEx for fiscal 2010 totaled $183 million compared to $237 million of depreciation.

Management projects continued CapEx restraint with capital spending in fiscal 2011 at or below annual depreciation. This includes all capital required to accomplish the Hog Production group cost reduction initiative. Our effective tax rate for the fourth quarter was 84%, and 53% for the full fiscal year. The quarterly and annual tax rates reflect the benefits of foreign earnings taxed at lower rates, foreign tax loss carry-forwards and true-ups from prior tax periods. As we move into more typical earning levels in the coming quarters, we anticipate applying a more normalized effective tax rate for fiscal 2011 of between 32% and 34%.

Our key financial goals are to continue to reduce debt, deleverage the balance sheet, and reduce interest expense. At the end of fiscal 2010, debt, net of cash stood at $6.2 billion, down $230 million from the beginning of the fiscal year. Our debt to capitalization ratio, net of cash, declined from 52% at the beginning of the year, to 48% at the end of the fourth quarter. Debt to EBITDA ratio for the quarter just ended was 8.4 times compared to over 24 times 12 months ago. Management is committed to paying down debt by $1 billion over the next three years, and significantly reduce long-term annual interest expense through debt reduction and lower rates. Short-term interest expense for fiscal 2011 is projected to be similar to the $266 million of annual interest expense in fiscal 2010.

Liquidity remains strong throughout the quarter. Available cash and ABL drawing capabilities grew to $1.158 billion at year end with cash of $451 million. We remain respectful that we are carrying expensive cash, with the risk of Hog Production losses behind us, we can turn available cash to better uses to include CapEx spending to grow the business or opportunistic bond repurchases or possibly buying the remaining 51% of Butterball's operations we currently do not own. We announced earlier today that we've made an offer to purchase the remaining 51% interest in Butterball joint venture and related assets. The offer for approximately $200 million is in accordance with the joint venture's agreement buy-sell provisions.

By mid-September, our partner must accept our offer or buy our interest on the same economic basis. The transaction, one way or another, will close by the end of our third quarter. The performance of Butterball has not yet met our ROIC targets for several quarters. We strongly believe we need full control of Butterball in order to improve its performance or we need to exit and redeploy these resources in other more profitable packaged meats opportunities. If we are the buyer of Butterball, we have ample liquidity and available resources to close and make the necessary investments in operations and marketing. If we are a seller, we will exit the Turkey business at a fair price.

Finally, I would like to say we've come through a long, dark tunnel over the last two years and the light is getting very bright. Our restructured Pork Group continues to put up solid numbers. We're on the good side of the Hog cycle. A slimmed down Hog Production group has begun to make contribution to the bottom line and we have initiated a program to improve Hog Production group's long-term competitive raising costs. Our international integrated operations are well positioned in their respective markets. And we have significantly improved our balance sheet and reduced overall financial risks. I look forward to fiscal 2011. Thank you very much for your time and attention. Now, over to Larry.

Thank you, very much, Bo and thank you, ladies and gentlemen, for joining this morning. From my perspective, the quarter was respectable. Certainly have to make adjustments for these mark-to-market adjustments on our hedging position which Bo spoke to, and this represents a second quarter in a row in which the Company from our perspective is reporting profitable results.

As we look at our year, it's a two-part year. The first half was certainly very difficult and the second half was a period of improving results. I don't need to spend a great deal of time talking about the meat business, Bo's done a very good job talking about that except to tell you that we spent some four years focusing on improving the operations on our meat business. Improving the overall margins of that business. As you well know we made the management changes along the way. I think we've been reporting to you quarter to quarter to quarter to quarter about our improving results in that end of the business.

We announced a restructuring a little over a year ago. We're announcing to you today the restructuring is complete. We have accomplished what we wanted to accomplish in that, and the benefits of that are flowing to the bottom line. In fact, we added to the restructuring by adding another plant this past April, which was the closing of our fresh meat operation in Sioux City, Iowa, which is now closed and represents the final step which was not part of the original plan in the restructuring. We think that part of the business is delivering, and I think it will continue to be at a very competitive position and will continue to demonstrate the benefits of that focus that we've had over these past four years.

Now it is time for us to turn our attention to the live production side of the business. As Bo indicated, the big losses in Hog Production are probably behind us for the foreseeable future. There is a misunderstanding, I believe, in the marketplace about the cost structure of that end of the business. The belief is that people are raising Hogs in the mid-40s. The facts are that people are raising in the 50s. There has been a cost shift in that business with a step change in the costing of the green inputs into that business and that's a reality of this business. So while the Hog market today is in the $0.55 and closer to $0.60 margin, all-in, the margins which would traditionally be delivering historically record profits is only delivering very modest profits.

That's the reality of the business. We understand that. And we are focused on that end of the business now. And today, we are announcing that we are starting the process which is a bit under way of a new Hog cost improvement initiative. Bo alluded to it in his comments as well as it's in the press release. We have charges flowing through the quarter of about $9 million related to that. It is a multi-year strategy. It will not hit the bottom line immediately.

In the past, we've focused our capital investments where we thought we could get the biggest bang for our buck, the fastest. That was in the meat processing side where we knew we could make the plant rationalizations and make those flow to the bottom line quickly. That has been done. Now we need to restructure our Hog raising operations to get all that we can from a competitive side. Many parts of that business are highly competitive today. However, there are some pieces that are not as competitive as they need to be and we understand that.

This new initiative will require approximately $90 million in capital expenditures, as well as there will be $40 million to $50 million of one-time charges that will flow through the P&L as we execute this strategy. We do expect to make the investments in this business within our capital budgets and still maintain our discipline over capital expenditures to hold capital expenditures to depreciation. The benefits of this new initiative is to improve the cost structure of somewhere between $75 million to $100 million, as well as improve the value of the animal that is delivered to the meat processing plants.

We believe this will change the structure of our live production operations and make us highly competitive on that end of the business as I believe we have made big strides on the meat processing side. I am convinced this will work. We have the people in place to do this. And we have been developing this plan now for several months, if not several quarters, to make sure we have a plan that we believe we can execute. It is the life cycle of an animal. I can't change that life cycle. And unfortunately, it may be four years before the full benefits of this start to finally accrue to the bottom line. They will ratably come in, we believe, best projection of that, again we're dealings of life cycles of animals. It is the right thing to do to reposition this Hog production side of the business and we are extremely excited about what we believe we can get out of that.

The second point I want to turn your attention to is hedging. I know there has been a great deal of conversation regarding this issue, and many of you -- we have heard from many of you that you have communicated to us about the frustrations you feel in understanding this end of the business and the impossibility of getting transparency of our hedging activities through our financial reporting. We agree with that. The accounting rules surrounding this are very complicated and in many cases yield some very strange results. What on the surface appears to be an obvious hedging situation can many times end up not being straightforward.

A good example of that would be a farmer hedge where the farmer will agree to sell us Hogs at a fixed price at a future point in time in which we take an odds of futures position, in the futures market to hedge against that to guarantee the pricing at the plants, to take the risk out of the business, not to add risk to the business. It appears on the surface to be a very straightforward transaction. The actual accounting for that is quite the opposite. And this quarter's results, there's a $15 million charge that's flowing through our fresh Pork results in the Pork segment of the operating results, and that's the direct result of these kinds of transactions. I can tell you today that half of that $15 million has already reversed in the month of May when the animals arrived at the plants. This is good business.

And it's good between the supplier being the farmer and the plants securing a supply of live stock to their operations. It works for both sides of the business. Yes, unfortunately, the accounting rules treat it differently. Beyond that, as you know, we take significant positions in the grain markets. To protect our raising costs and are reinforced to protect our raising costs. Over the years this has worked very well. Of late, it has not worked as well.

We openly acknowledge that the last two years -- two years ago the decision we made to hedge corn at that point in time did not work. We thought we were responding to the sharp one-up in the grain markets. There was a common belief that corn would reach $10 a bushel. It went up very sharply, retreated back into the low $6 range. We locked in our position as we explained many times in an effort to protect our P&L, not as an effort to try to manipulate or speculate in the grain market. We were simply protecting our buying position.

The big issue has always been the Hog positions. This is the one that the accounting rules are very complicated surrounding. They have limited benefits and they oftentimes yield some very strange results. We are reporting a $58 million mark-to-market charge which Mr. Manly just outlined to you. That is flowing through the Hog Production side of the segment P&L. We made the decisions early in this year, once again, to protect our P&L, as we have seen two past years when the Hog markets have turned down.

One year ago, we thought we were going to have a very strong year in the Hog market and swine flu hit and the market fell apart again. So we did take some early positions in the Hog market in an effort to ensure that big losses did not occur again in the Hog Production side of this business. Those may have been a bit early. The pig crop report came out in March and the futures market ran up. As a result, we have a large mark-to-market charge coming through the end of the April period. At this point, those hedges have not run through. The periods have not occurred and we will see in the end whether those decisions were good decisions or not good decisions. But, bottom line, we understand your frustration and we understand the difficulty in our ability to communicate to you clearly and transparently, which is one of the goals we have as a management team.

With all that being said, today we are announcing that we are altering our hedging strategy from this point going forward. In terms of the Hog Production -- the Hog Production side of the business and live Hog prices, we are committing to you today that we will live closer to the cash market. Unless the markets yield to us something that we would consider an exceptional opportunity on the profit side of this business, we will not be seeking large positions in the commodities market to cover these hogs. In effect, we will largely be -- we will be at the mercy of the day-to-day cash markets on the Hog side.

In terms of grain, we may be a bit more active. We see that as an opportunity to control our raising cost. And so when the markets yield us very attractive grain input cost, we will likely seek the opportunity to lock some of that in. In nearly every case, we will never lock in all of our position. Limited amounts, we will pursue when those markets look extremely attractive.

In terms of arrangements with our farmers out there for the delivery of animals to our plants at a future date, this is good business. It's very modest in terms of its impact to our financial statement and we will continue to pursue those, because it's part of our meat strategy that has nothing to do with the live production side of this business. It has to do with the supply agreement to our operating companies. We continue to believe that the hedging provides an opportunity to us to both enhance and protect our P&L. However, we do understand value propositions. And we understand that the market perspective on this side of the business is not good.

It's difficult to communicate to you and the benefits are often mistimed with the valuation and the characterization from an accounting standpoint in the interim periods. With that being said, we understand that the market penalty from your side may far outweigh the benefits that we are achieving at the ultimate bottom line. We think that we are probably leaving money on the table. We believe that it could be more valuable to us as a Company. However, we understand the realities and we serve to enhance your shareholder value and at this point the activities that we adopt, albeit profitable over time, are not adding to shareholder value.

Now, changing subjects, I want to talk about Butterball. We entered into the Butterball arrangement as part of the acquisition of the on-records business from ConAgra a couple years ago. It was two different businesses that we merged with our partner, the Butterball business into our existing Carolina Turkey business. That is the business today. We have been unhappy with the margins that we have achieved in that end of the business and Bo spoke about return on invested capital a couple of minutes ago. We take that issue very seriously.

We believe that business has been underinvested in, both before we owned it at ConAgra and since it's been part of this joint venture between Smithfield and Maxwell Farms. We believe that the ownership structure of this business is a significant part of the problem. And from that standpoint, we are not prepared to go forward with our existing arrangement. We want in or out. This business needs money to make the operational improvements that we believe can be very significant to the business and reshape the cost structure of that business. It needs to be done and we are prepared to do it.

As well, this business needs a marketing campaign. There are limited marketing moneys available through the joint venture and we believe this is a tremendous household brand that has not been adequately supported. It needs a new boost of the marketing, and we are prepared to do that as an owner. We are excited about the opportunity to own that business. However, we are prepared to exit.

We will not accept the returns from a commodity business in the way in which it is run today. This is too valuable an asset to allow it to sit and not yield the benefit of the value of that brand. It is the right thing to do to change this structure. We are excited about the opportunity to report to you in September that we are the owner of this business, and if we are not the owner, and we cannot affect any change given the returns we're at today from a shareholder standpoint, you should want us to exit. It's not delivering the return and it's the right thing to do for our shareholders. We can't deliver the return, we ought to get out.

Looking forward, as Bo indicated, the Hog market has turned. Hog profits should not be a drag going forward. However, liquidation has not been to the extent we wished it would have been and it probably has stopped. I would have liked to have seen another 2 or 3% reduction in the herds but that didn't happen. In terms of the meat business, margins will likely be squeezed. However, there are still some substantial opportunities on the fresh Pork side of this business that we can still get even in this environment.

The restructuring has worked. Freezer stocks are low. We are -- the international markets are open. This management team is now turning its attention to growing the top line. And in fact, we have changed the compensation plan for our IOC officers to one that is somewhat -- has a significant part of their compensation tied to the ability to grow the top line.

It is not just bottom line oriented. We have given up some of the volume as part of our restructuring plan. We are now focused on getting that back and the compensation plan has been modified to do that. As Bo said, we think we have made some tough decisions, operationally to close seven plants, including the last Sioux City, to give up sales volume, which is extremely difficult, and market share is something that management teams have trouble reconciling.

We've made management changes across the meat processing business that are all gelling very nicely. We made herd reduction that in the market leader on side of the business. I think Bo and his team and the management team have done excellent job of controlling capital expenditures, even as we've seen the pressure to make the changes operationally. I think we have addressed the liquidity and the debt structure of this company by reducing the debt, sharply improving liquidity.

Finally, today we are announcing a new hedging strategy as well as a new cost improvement initiative at the Hog Production side of the business. Those, again, are tough decisions to make. However, we believe they are the right thing to do for the Company going forward. I believe that the changes and the decisions we have made have positioned this company well as Mr. Manly just told you.

I look forward to fiscal 2011 and I look forward to reporting to you on a quarter to quarter basis, clearly coming off the year that we just had that may be an easy comparison but I hope the comparisons we make are comfortably better and are an enjoyable part of the go-forward conference calls, this looks like as Bo said the sun is shining on us at this point. We will execute to the best we can. I think that the meat business will be fine. I think the Hog Production side of the business has sharply improved. Unfortunately, I don't think it's going to fully deliver all of the margins that you think it might. However, it doesn't have to in order for us to still deliver very good results to shareholders.

With that being said, Keira, we'll be glad to take their questions.

Thank you, Larry. In order to provide opportunity to as many analysts as possible to ask questions, we request that you ask only one question. If you have another question, please get back in the queue. Operator, please open the line.

Thank you. (Operator Instructions). Our first question comes from the line of Christine McCracken, Cleveland Research. Please go ahead.

Good morning.

Good morning, Christine.

Larry, just on your decision to make a move here on Butterball, clearly this business has struggled I think since you bought it. But I'm wondering, is there anything that makes the timing I guess more pressing? Is it your assumption that this is a business that you can kind of return to its peak level of profitability? Why not just decide to sell this business at this point?

Well, Christine, from one -- let me make a simple comment. We can't sell this business. We aren't the owner. We only own 49% of the business, so we can't force -- we can't force this business to be sold. We can only force our partner or make an offer to buy our partner out and they can decide whether they want to be the buyer or the seller.

Now let me address your first question, which I think is a very good one. This business did just fine as long as it didn't require any cash from the partners. And so it made money, albeit not at levels we would have been satisfied with. It made enough money that the partners were getting a little bit out of it so it didn't have any cash needs. Then you have the grain spike that occurred and the business suffered just like every business that was subject to these sharp run-up in grain prices. It requires capital. It certainly strained some of the financial covenants that were existing within that entity, has strained the relations between the two partners, because the business needs to make some fundamental changes just as we have on the restructuring side on the meat business, it needs to be restructured operationally. They acknowledged that.

However, it takes capital to do that and our partners are simply -- I'm not sure they're -- I don't want to go deep into that. That's their decision making in terms of their capital investments, but the fact is we've not been able to secure the capital from both the partners to make this work. So we're not prepared to go forward in a mediocre fashion, living as a commodity business. This is too good a business.

You said peak earnings. I don't know what the peak earnings of Butterball ever were. It's been so underinvested by everyone for so many years that this business, I don't know that anyone knows the potential. I do know that our margins are below those of our competitor and you know who that competitor is. And we track that every quarter and I -- and we will not accept that comparison.

Is selling this business part of your goal of reducing debt by $1 billion or is that completely independent?

Christine, this is Bo Manly. Those are two independent decisions.

All right. Thanks.

You're welcome.

Our next question comes from the line of Vincent Andrews, Morgan Stanley. Please go ahead.

This is Greg Van Winkle, stepping in for Vincent. Was hoping you could talk a little bit more about this Hog Production cost savings initiative. Could you maybe give a little more color on how and where you plan to cut costs at that business, maybe give an example or something and when we might expect to see those savings start to show up. I know you said it might be more of a long-term payoff kind of thing.

This is Bo Manly. I appreciate that question. Very good. One very good example is when we bought the Premium Standard Farms operations, they had genetic contracts with third party suppliers. We have our own internal genetics that are significantly more cost effective as well as in our minds perhaps even advantageous from a performance perspective. We are going to make that change. That is already under way. That is in the neighborhood of between $15 million to $20 million in terms of overall cost. But that will take probably three years to fully implement and get the new animals coming out the back of the system.

So that's why we said it's a very long program. But in general, to give you a little bit of flavor, total capital expenditures for the entire initiative are $86 million, that's going to be spread over three years in total. It will include also one-time charges of $43 million, but we will have lower costs in the neighborhood of $91 million on a reoccurring basis. And that will also have enhanced revenues from improved quality of the animals coming out of the system. So it's a double improvement. We have lower costs and better revenues, although it's a long row to hoe.

Okay.

Our next question comes from the line of Akshay Jagdale, KeyBanc. Please go ahead.

Good morning.

Good morning,.

Just wanted to focus on the Hog production business again, Bo, and Larry. Can you talk about what normal numbers are there? I mean, you've talked in the past about per head and excluding, including, interest, et cetera, so I know there's a lot of noise with your international operation being in there as well as the hedging, et cetera. But if I look at your business as you report it, adjusted for charges, the average spread even if I give you credit for $15 a head next year, the average spread has been about $4 a head. So as you are trying to be more transparent and we really appreciate that, can you talk about just from a modeling perspective what that normal number should look like in light of your restructuring as well?

Yes, I can, Akshay. And I appreciate the question. And you are correct that our Hog Production group does include the international area as well, but it's a minor part of that process. In terms of where we are looking for, we're looking for an EBIT of $10 per head to $15 over the long run. That would imply an EBITDA of somewhere around $17 to $20 per head in terms of our overall performance in that area.

That's very helpful. I'll get back in line.

And our next question comes from the line of Christina McGlone, Deutsche Bank. Please go ahead.

Good morning. I was wondering if you could maybe explain -- Bo, you mentioned Hog prices started to fall since the quarter closed and Pork has been weak the last several weeks. Is this something that's just seasonal? Is there something else going on, if you could kind of talk to current market conditions.

Well, while we have experienced a decline in live prices over the past several weeks, we have very acceptable earnings on the cut-out basis.

Christina, I'm not sure what you've got. This is Larry. I'm not sure where you got that message that we said that meat prices have declined. That's not true. In fact, Pork bellies have set all-time highs. They have retreated a bit now. But I mean, no, Pork pricing is very strong.

Cut-out is good right now.

If you look at cut-out sequentially over the past two weeks or so, it's come off. Like yesterday, Pork prices continued to fall and I think it's pushed maybe cash Hog prices lower, which has set futures lower. I know it's just been a few weeks, but there's also so much currency movement that I wasn't sure if it was related.

It's very difficult to look at even a one week period of time to try to make any definitive conclusions. There's so many moving parts as you point out, exports, domestic demand, live prices and meat prices are all moving into their own drummer. So if you can give us a little bit more time, we can certainly give you a better outlook, looking through the rear view mirror but you're asking some real-time questions that there's too many moving pieces to.

I think we would tell you today that the Hog raising side of the business is not producing the same level of profitability. My point earlier, my comments, I mean, we saw Hogs in the 60s following the pig crop report and that's sharp run-up there in the month of May. That's retreated as Bo made reference to and I think he's right on point there. However, the meat side of the business has been very strong and we're seeing margins in some of the fresh Pork that we would routinely not see except in the fall. We're seeing those margins here in the summer which is an exception.

Okay. I guess maybe to help my follow-up, Larry, do you think that the Hog raising profitability or outlook for fiscal 2011 is the same as when you articulated it at Ken Zaslow's conference?

If I could step in, at this point that conference was right after the end of our fiscal year. We had experienced the tremendous run-up in live Hog prices and were using that future strip as the basis for those projections and I think we were referring to the BMO conference. Live prices have retreated about $5 per hundredweight since that time or about $15 per head.

I think we made the comment, I think that was at the BMO conference, if not before, the fact that we were surprised at the pig crop report and we were surprised at the reaction of futures markets and I think you can see given that a little bit of time for that to synthesize through the market. The surprise that we didn't understand has reversed.

But I think your observation is correct. The direction, I won't call it guidance, the direction that I gave for a prior question today was at a lower level than what we had given people at BMO. But frankly, that's reflective of how difficult it is to prognosticate in this business with so many moving pieces.

When you've got a Hog that's 250 pounds, if it moves in these markets which can move as much as $3 in a day, that can affect the P&L and the estimated profitability for the year by 50% on simply one day's move. So it can be extraordinarily difficult. That's why we refrain so much from trying to give people projections because what's true today can change so quickly in this business and those who follow this business for a number of years know that's why people in this industry are so reticent to start estimating the future. And projecting the future.

Our next question comes from Farha Aslam of Stephens, Inc. Please go ahead.

Hi, good morning.

Good morning.

Bo, quick question, first, could you repeat Akshay's -- your answer to Akshay's, what was your Hog profit target now?

In terms of our targets, on an ongoing -- you're not asking for projection for this year, you're looking for targets. We're looking for a long-term target of $10 to $15 per head, EBITDA basis going forward. I'm sorry. BBT basis.

BBT.

BBT.

Farha, I want to be clear. I want to be clear about this. I don't believe that we will make those targets this year. In spite of the fact that the market per day for cash is in the mid-50s, raising costs in this business are in the mid-50s. They are not $0.45 and $0.50 a pound which there seems to be that common misbelief and I continue to say it again and again and again. We can't do it in this call to explain that to you in significant detail, but the fact is that $55 Hog market does not yield that $10 to $15 PVT profit on an annual basis. It does not do that. Has to be closer to $60 a head. $60 a hundredweight and that's where the market has to be, unless grain costs continue to come back.

And our next question comes from the line of Diane Geissler, CLSA. Please go ahead.

Good morning.

Good morning, Diane.

I'm curious on your new hedging strategy, I realize GAAP is a little bit of an impediment with some of these rules that they have, but are you trying to -- what's your aim here? Are you trying to stabilize your earnings or are you going for multiple expansion because your earnings won't be moving around with the mark-to-markets, because to me I think hedging is an economic decision and should remain an economic decision, i e, what's the best way to maximize the profitability of our production so I get a little nervous when you change hedging strategy because the way GAAP is set up. If you could talk about a little bit more, I'd appreciate it.

Diane, I'll try to give you some color and I'm going to ask Bo as well to address that as well because I think this is a very important point for this call. We agree that there are economic benefits to using the futures markets to lock in growing costs, particularly related to grains, that that's an opportunity. The markets are an opportunity to manage that side of the business, as well, the futures markets are an opportunity to, quote, margin manage the live production side of the business. And I think we've taken advantage of that. We have not always been right and we were not right on corn two years ago and there are many out there saying that you're not right this year in the positions that you took on your Hog Production side of the business earlier in the calendar year.

My response to those, we'll see. Let's let the summer and the fall occur and we'll find out if we made good decisions or bad decisions. But the fact is, the accounting rules are extremely complex. That's as nicely as I can say it. We have heard loudly from many shareholders whom Bo and I have met in the last six to eight weeks and there's a common belief out there that this is impossible to model and the mark-to-market on this is so dramatic to our earnings that it distorts them to the point that I think many shareholders are frustrated.

And with that, we're saying our ultimate goal is to be transparent to our shareholders and to deliver to you results that we think you can understand. And as much of those as we can. I believe, Diane, this new strategy will reduce the overall benefit that we will receive from the futures market. I do believe that. And, quote, we're leaving money on the table. However, I think that the market will understand transparency and will reward us for being more transparent. So if that's called multiple expansion, let's use multiple expansion. Bo?

Yes, I agree totally with Larry's thought process and your comments as well, that there is an economic benefit and it would be easy to tick off half a dozen ways futures markets could be used to provide benefits to our customers, provide benefits to our suppliers as well as our own bottom line. We have seen in periods of time when we can have significant movement on a quarterly basis because of mark-to-market impact of our futures positions of our derivatives. We have the ability to look at a particular hedge and determine what different techniques we can use and we will go forward and minimize those instances in which mark-to-market, we have a choice between mark-to-market versus hedge accounting and we'll take that avenue that offers hedge accounting and that will probably mean that we will not be as aggressive in terms of our hedge positions if we're not using those instances that could -- those derivatives that could result in mark-to-market movement of our earnings. So instead of using both mark-to-market hedge accounting activities as well as hedge accounting activities, we're going to reduce our exposure to mark-to-market effects.

Our next question comes from the line of Heather Jones, BB&T Capital Markets. Please go ahead.

Good morning.

Hi, Heather.

Hi. Just a quick question on your SG&A, about 150 or so for the quarter, and I understand your comments regarding changes in the cost, but I'm wondering, if this is down pretty substantially not only year on year but sequentially and just wondering is that a number that we should be using going forward on a quarterly basis?

I don't think -- we had some large changes that were due in part to FX. We had some change that will be one-time. I would say that probably while we have had reductions in SG&A associated with the Pork restructuring, that we will not continue with the total decrease that you've seen going forward in SG&A in this last report.

Okay. And on the live Hog side, you said EBT of $10 to $15 as a long-term target. Could you remind us of what your rough interest expense cost is per Hog?

Roughly about $7 per head.

Okay. All right. Thank you.

You're welcome.

Our next question comes from the line of Ken Zaslow with BMO Capital Markets. Please go ahead.

Hey, good morning, guys.

Hi, Ken.

Just one side comment, just -- if you guys think there's something better, how to run a Company better than the shareholders, for whatever it's worth, you guys do know more than your shareholders so I understand why you're shifting your policy on hedging. But again, you guys are a lot more knowledgeable than everybody. For whatever that's worth. I'm just going forward and stuff, you guys know how to run a Company. I'd be surprised that you should be guided by shareholders. But that's my one comment. The other question I have, if you do buy the Butterball, you did say that you would look at capital alternatives would be evaluated. What does that mean?

Ken, as we indicated or I indicated earlier, we've got over $450 million worth of cash on the balance sheet. As well as significant borrowing capacity under our ABL. So we've got plenty of liquidity to close the transaction. At the same time, as Larry mentioned, that there are requirements for capital improvements to make operational changes and efficiencies as well as monies required for marketing programs. It will be pretty much front end loaded. We're not in a position to comment about the extent of that, but we certainly have more than adequate resources to invest in improvements to the business.

Okay.

And it may be a combination of both cash as well as capital markets and we look at all avenues being available to us at this point in time.

Great. Thank you.

Our next question comes from the line of Tim Ramey with DA Davidson. Please go ahead.

Wanted to focus on a comment Larry made on turning your attention to growing the top line and incentivizing compensation to top line growth. This has usually been a horrible idea for price taking companies which is largely what you are. You don't set the price of your products. Is this incentive comp tied to sales? Is it tied to volume growth? What's it tied to and why does it make sense for shareholders?

Tim, let me tell you that I think it's -- I think that -- I'm not going to give details of an executive compensation plan. The proxy will outline that to the extent they're in the proxy and some of them are. So you'll get to see it. The fact is, the compensation that's tied to top line growth is tied to specifically to volume. Now, I know what your reaction, and I've used that word, was. Let me also tell you, that there are different plans for different executives. So some executives are tied much more to volume. Other executives are tied less to volume and more to profit.

So what I think we have created is a perfect friction from the sales organization responsible for growing the top line and the senior management responsible for the bottom line. So I think we have created some very good tension in this compensation plan and that is by design. Now, we have given up about 7% of our packaged meats business. That was by design of restructuring, plus we were walking away from low margin business. I am now directing the organization to go back after that 7% volume loss, but with margin and if you don't, you won't get paid for it. So I think to the extent you can structure compensation plans, it's an attempt to do that. No plans are perfect. And people learn how to game the system once they figure out how they work. However, I think it creates the right incentives that Smithfield is trying to adjust the send the organization where we want it to go. So I hope that answers your question.

Well, would Hog Production be tied to volume growth? Because that kind of could be probable.

Zero.

Zero. Good to hear. Thank you.

Our next question comes from Reza Vahabzadeh with Barclays Capital. Please go ahead.

Good morning, Reza.

Good morning. Just a couple of housekeeping items, Bo, for you. On the debt levels, you mentioned total debt of $6.2 billion. Did you mean $2.6 billion?

If I said $6.2 billion, that's very, very very wrong. $2.6 billion is correct. I appreciate that, Reza. Thank you.

No problem. And the cash was $450 million; right?

Yes, $451 million, I think.

Would you anticipate generating material amount of free cash flow in FY 2011, based on the CapEx you mentioned?

Yes, we do.

Okay. And then on the Pork side, you did not mention much about Pork volumes. Can you just touch on that? And also, if you can talk about your outlook on Pork margins. Pretty nice this quarter.

This is Larry. I'll take that question. In terms of volume, I thought that's a bit of what I just said to Tim Ramey. I don't anticipate growth, much growth on the fresh Pork side of the business. In fact, we're down because we closed our Sioux City plant at the end of April, so it's very likely, you see comparables on the fresh meat side, you're going to see down.

Secondly, you're going to see down on fresh meat as more of that fresh meat is converted into processed meats. What we are doing is we're going on the packaged and processed meats side of the business, we are going back after some of that 7% volume that we lost through the restructuring. And at better margins. So we're trying to have top line growth in our packaged meats business. We're not expecting top line growth on the fresh meat side.

In terms of -- let me address your final question, in terms of margins. I think margins will be squeezed. These raw materials, if you've tracked things like Pork trim, or hams or bellies, you will see those raw material costs are up 30, 40, 50, 75%. These guys are under tremendous pressure in terms of the cost inputs for all these packaged meats goods and so these margins are feeling some pressure and I told you that would happen. We said that now for some period of time. Long period of time.

However, I'm still pleased with the margins we're delivering on the packaged meats side of the business, so I think you will see some margin compression and in fact, I expect the comparisons potentially on the packaged meat side of the business may not match last year. However, fresh meat might be much better and in fact Hog Production will be dramatically better. And so the combination of those three I think will be very good to shareholders.

Our next question comes from the line of Ken Goldman with JPMorgan. Please go ahead.

Larry, you've been by my read, guiding investors or at least maybe even the sell side down a little bit for our Hog Production for this year. Sell side on the consensus basis is at $1.84. Are you saying that the build-up to that number is a bit aggressive and that maybe that number from your read right now is a bit aggressive, or is that too much of a fine read there?

I don't even know where you got your $1.84 from. So I couldn't opine on that even if I wanted to opine on that because I don't know your, quote, build-up to $1.84 to start with. However, I want to be clear. I guess we've gotten in the prior call I used the word trapped, are you happy that you're no longer beating your wife question. In terms of would you be disappointed if you didn't deliver $2 a share. I've now heard that from so many people, my wife is now quoting it.

The fact is, it's extremely difficult. I would tell you that I think the Hog Production side, we think we have -- we have been talking for some time that there is concern out there that we are producing record profitability on the live production side of this business. That is simply not the case in the industry and expansion among competitors would demonstrate to you that know one's realizing those kinds of margins. They're going to be very modest. And I think that the meat business is going to be very solid as a result of this, although some margin compression on the packaged meats side, that's as far as I can go from that standpoint. I guess you guys, that's what you guys get paid to do is develop your models and try to guess and your guess may be every bit as good as my actual delivery. I hope I outperform you. But I'm still subject to the vagaries of the market.

I think that's a fair answer. You were saying a couple times you thought we were a bit aggressive in our estimates. So you are looking at something out there. I'm just wondering, do you think we're too aggressive overall in our Hog farming numbers. Is that fair?

I don't know what you're projecting on the Hog raising side of the business so I honestly don't know what it is. Do you, Bo?

No, I don't. I don't have anything to embellish on that. Again, we're not going to prognosticate what we think our earnings are going to be. That's not the purpose for this call.

All right.

Our next question comes from the line of Robert Moskow with Credit Suisse. Please go ahead.

Hi. Thank you. What we use for forecasting costs for Hog Production is just the standard John Lawrence model and ours is coming up around $50 per head for raising cost I think is what it is. And so you're saying that it could be in the mid-50s. Have you taken a look at that model and try to figure out -- do you think that they're underestimating the costs or what do you think the difference is?

This is Bo Manly. We understand where you're getting your numbers and certainly I think Dr. Lawrence is a wonderful economist. However, we have to look at our business not on the averages within Iowa state model. We have to look at grain on a delivery basis. That has to come all the way to Utah or go all the way to North Carolina at almost $1 a bushel more than what you might find in an Iowa interior environment. At the same time there is an effort to look at the financing aspects of the business, that as we mentioned before there's a question of how much interest do we have against our operations and we said $7 per head.

That's up from about $2.50 two or three years ago as we had to pump cash into that side of the business and put more capital against it. We don't think that that is accurately being reflected in the Iowa state models in terms of the interest that is being absorbed by these Hog operations and you've got everybody from third party investors involved in the Hog business that are paying for interest on every dollar of capital employed, to farmers that may have no interest because of their own personal situation. So it's very difficult to apply that Iowa state model to everybody in the industry and say that we're going to white wash the wall of Hog Production with one modeling exercise.

I would think that model would tend to understate everyone's call. There's not a financing charge in that model, is there?

No.

Our next question comes from the line of Ann Gurkin with Davenport. Please go ahead.

Good morning.

Good morning.

Larry, you commented on the margin pressure, potential margin pressure in the packaged meats. Can you still deliver in that $0.10 to $0.14 range?

I think we have -- I think we have said that was going forward $0.10 to $0.12, but yes, I have the $0.10 goal and we have every intention of delivering that $0.10 goal. I don't call this an adverse market, but in a market that raw material is moving up on packaged meats. We still have -- we have every reason to commit to that kind of margin.

And then if I could just get a comment on the export market now with China and Russia reopening any kind of comments, outlook, status of Pork supply in China right now.

They're up. I mean, they're open. These markets are open. However, our product has moved up pretty dramatically in terms of cost to them and when you add the VAT and the tariffs and the freight to that, that can get -- you deal with real, real economics. As we're moved into the beginning of the new fiscal year on a year-over-year basis, our exports are up and so they were down last year and they're up comparatively going into this new fiscal year. And that's going to be a -- again, they're open, which the good news is economics dictate at least you can sell them. Before you couldn't even sell them regardless of what the economics are. In China, Hog prices have been very close to US prices. So from an economic standpoint, made to sense to sell any meat over there when you paid all the tariffs. That has moved up some and is expected to move up even further out, the further out we look we do believe there's some strong liquidation going on in China which should over time provide us some good opportunities.

I would now like to turn this conference back to Mr. Larry Pope.

Thank you very much, folks, for listening this morning. I think that we are running the business as best we can. And I think we made some decisions that are going to benefit the bottom line going forward. We look forward to a good fiscal 2011. We look forward to reporting to you upon the first quarter results here in early September. Thank you and have a good day.

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