Smithfield Foods Inc (SFD) 2011 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Smithfield Foods fiscal 2011 fourth-quarter earnings conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session. Instructions will be given at that time. (Operator Instructions). As a reminder, this conference is being recorded. I'd now like to turn the conference over to Keira Lombardo. Please go ahead.

Thank you. Good morning. Welcome to the conference call to discuss Smithfield Foods' fiscal 201 fourth-quarter and full-year results. We would like to caution you 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 feed the forward-looking section of the Company's 10-K for fiscal year 2010. You can access the 10-K and our press release on our website at SmithfieldFoods.com.

On our call today are Larry Pope, President and Chief Executive Officer and Bo Manly, Chief Financial Officer. This is Keira Lombardo, Vice President of Investor Relations. Larry will begin our call this morning with a review of operations, followed by Bo, who will review the companies financial results and then Larry will provide our outlook for the future, after which the line will be open for questions. Larry?

Thank you very much, Keira. Welcome, ladies and gentlemen to our fourth-quarter call. I am extremely pleased to report another record quarter for the Company, as well as a record year for the Company. As you can tell, we've seen, from the press release we're reporting $98.4 million or $0.59 a share, and as explained in the press release, we've got some costs associated that with buying back our bonds resulting in about $0.26 a share, so on a proper basis, I would say it's $0.85 a share which is a record for the Company. For the year, we're showing $521 million or $3.12 a share. These are extremely good results, and we are extremely proud of all the efforts that this organization has made to deliver these kinds of results over these past four quarters.

I don't need to tell those of you who follow the Company and the industry, you realize that the industry fundamentals have been very good for an awful lot of this fiscal year, largely related to the fresh pork complex and as you know, the fresh pork complex has been bolstered by the strong export environment that has been existing now for some time, as well as some changes that have gone on, on the fresh pork side relative to supply and demand. You may remember that the Company closed our Sioux City, Iowa plant at the end of April of last year, and the fresh pork complex improved almost immediately following that, so I believe that the closing of that plant, which as we had suspected, would be positive for the fresh pork industry, did work out to be positive, and I believe was instrumental in the success and the profitability across the fresh pork business this past year. That combined with the export environment created an environment where we saw margins and our fresh pork business like we have never seen.

This is I think my 31st or 32nd year in the industry, and I don't believe in my in the industry that I've ever seen margins at this level for this length of time. Now, I'm aware that margins, that many of you are aware that margins have declined following the end of the fiscal year and I'll hold my comments relative to that until I give you my outlook, but the export markets have been good. The industry has been reporting quarter after quarter improved export volumes.

I'm sure you're aware this is largely tied to the Asian markets and the USDA has recently put out some additional information in terms of their forecasts on exports being up 10% to 15%. We have that same opinion, and I know that you're aware that the exports in the very most recent months are up some 17%, and from our standpoint, our exports are flat; however, we have substantially less available in the export markets because of the reduced kill associated with the Sioux City plant, but we are seeing that kind of activity in the Asian markets.

As well, I am seeing percentage of production in this industry that's going out of the country. I have oftentimes said that's sort of a heroin of this industry and we all get hooked on this of these exports, but the export markets have been fueling this industry in a positive way, and I think we're in an environment of cheap US dollars and with a balance between supply and demand, both domestically and around the world, where we're not seeing much expansion anywhere in the world, and as these economies are recovering, it's simply coming to the US, where our domestic pricing is very competitive in the world market and given the trust that the world markets have for US product, we're getting the orders. All of the US producers are getting the orders and that bodes very well for this industry.

Turning to the packaged meat side of the business, that's again a very good story for the Company. I am very pleased and Bo will go over more of the details, but I'm very pleased with our sales effort and our sales discipline on the processed and package meat side of the business. We are continuing to deliver well above my $0.10 goal that I had for the Company a few years ago. We're well above that, in spite of the fact that we have had sharply higher raw material costs and I know that others in our industry and outside of our industry in the grocery industry have been discussing this, as they've been reporting the pressures they're feeling, as they try to pass on these raw material costs through to the market.

I am very pleased with the success our organization has had in passing those raw material costs through. Again, that is the result of a good supply and demand balance. There's the opportunity to ship some of this product out of the United States as an alternative, and that's given us some awfully good strength in terms of our ability in the packaged meat side. The other side is that we have got a slight, we have had a slight volume decline, which has been part of our continuing process now for some time. I am bothered by that, as I look at the detail behind that, the story behind the story is really very, very good. What we have lost continues to be business that is very low margin, and on the private label side of the business.

Conversely, our branded business continues to perform very well. In fact it performs, even continues to perform even better. Some examples and we outlined some of those in the press release but I'll put a little more color on that today. Our Easter spiral ham business was up 12% when our branded business in the Smithfield brand under spiral is up 50%, so that is a tremendously good story. Our marinated pork under our branded program was up 18%, and our Eckrich Smoked Sausage branded business was up 25% and our Smithfield branded bacon business was up 26%, and so those kinds of things give us enormous confidence in the fact that we are beginning to speak more and more to our consumers.

We are increasing our attention and the money that we are spending on the marketing side of this business and in fact for the coming year, our new fiscal year, we are committing an 18% increase in our consumer marketing trade spending in order to speak close and more often to the consumer out there. We want them to understand our brands and appreciate those. We are seeing benefit of that as we roll these marketing plans out. So while I am disappointed, and there are some areas in the packaged meats where our volumes have not held up, that we've lost some business that we would rather not have lost, in the cooked ham business, and the lunch meat business and we're focusing on that, and maybe we pushed the envelope a little too hard.

And we're looking for some top line growth going forward in the next year; however I am extremely pleased, we've been talking for some five years, about the focus of the Company towards these branded packaged meats and we continue I think to deliver margins in spite of the fact where we're in good markets or bad markets, George Richter, at our core group teams are much closer, much more aligned, and go to market in a much more disciplined way than they've ever gone in the past, and I think that is yielding tremendous benefits to the Company and that's the reason that our margins continue to stay in I think what Mr. Manly has referred to as the normalized range, we continue to deliver that normalized range because of the way in which we are going to market with these packaged meats.

Turning to the hog raising side of the business. It is profitable. Certainly some of our hedging positions that we've taken along the way have benefited the bottom line. I think we've been very smart about that process. It is, we've continued to be involved with our cost reduction plan that's in place. We're not quite halfway through that. We are seeing exactly the benefits we expected at this point. I think we saw something like $30 million in this last fiscal year, and we're looking for something along in that range for the next fiscal year in addition to that.

So that part of the process is just as we expected, as we renovate and realign these farms, we got out of one farm complex this quarter that didn't make sense for us. We're not seeing any expansion in that side of the business in the United States. I know the concern you all have relative to corn prices, and the impact the last time corn got into these ranges over $6, for what it did to the Company's P&L. I think if you look at the futures market that's not going to happen again, as well we have been smart again on the futures side, and we have taken protective hedges to ensure that if these corn markets get away from us, that we will not suffer to the extent of the market as a result of that. We've got nice positions.

We've got nice profits in these hedges, and we've got corn hedged at very favorable prices relative to the market, so that gives me a lot of comfort, a lot of comfort as I look at this hog production side of the business. We do expect the hog production business in spite of where corn is today, we do expect hog production to continue to be profitable through next fiscal year, so I think that should give you some comfort on this call.

From a balance sheet standpoint, Bo will speak much more clearly about that but we have a balance sheet, I think we've used the word, a fortress balance sheet before, but we've done a lot there, and the finance team has done a terrific job there, and I'm extremely proud of the job they've done over the last two years in paying down debt and repositioning the Company from a credit standpoint, as well as maintaining substantial liquidity, and as a result of that, I think the balance sheet is in the best its been in many years and again this is my 30-something year, and I was in the finance end of the business for a very long time, and I think the balance sheet is in better shape today than it was at any time of which when I was the finance executive for the Company.

I will take one final minute before turning it over to Bo for his comments to speak for just a second about Campofrio. I know that we put out a press release discussing that in a brief way. I would, we had previously announced the fact that the Company was in discussion relative to a tender offer related to Campofrio. Those were serious and they were in advanced discussion level. We did the due diligence process, and given the turmoil that's going on in Western Europe, as well as the raw material cost pressures that Campofrio was feeling, combined with the fact that I felt a strong need to issue some additional equity to help pay finance and pay for that acquisition, and given where the stock price is today, I simply could not go forward.

I certainly am focused on growing this Company and moving us forward; however, I think that you charged me in this job with the responsibility of making decisions, even when they're tough decisions, and we were certainly well down the road. Campofrio is an excellent Company. We have a 37% ownership, and we continue to have that. I'm a Director in that Company, as well as Joseph Luter IV. We continue to be actively involved with that Management team. I think that's something we will look at, probably not in the very near future, but I expect this is something that Smithfield has a continuing interest in.

The timing on this transaction was simply not right, and I will not go back to that until I got more clarity in terms of where the western European market is going to go and how our brands in that part of the world are going to perform under the pressures of the turmoil in that part of the world. I simply think it's in the best interest of our shareholders to not go forward, and I made that tough decision and canceled the talks, and we will put those off for another day, so I felt like an explanation of that to you today was in order, and I feel comfortable with that decision in spite of the fact that I have a lot of confidence in the future of Campofrio, I think the future of that as part of the Smithfield family is another day, not today.

With that being said, Bo, I'm going to turn it over to you and I'll give forward-looking outlook. Bo?

Thank you, Larry. Good morning, ladies and gentlemen. I'm delighted to report that record profit in our recent fourth quarter complements the record earnings in each of the prior three quarters. This winning stream combines to make the full year's $521 million net earnings and $1 billion operating profit turnaround extremely exciting. I'm confident as well that we have put in place many opportunities to continue this momentum into the new fiscal year.

Our fourth-quarter net income was $98 million and $521 million for the full fiscal 2011. This compares to losses of $5 million and $101 million in the respective periods in the prior year. Oh, what a difference a year can make. The record earnings result in a quarterly EPS of $0.59 and $3.12 per share for the full year. There is one particularly noteworthy item affecting net income and EPS for the recent quarter. As Larry has mentioned, results for the fourth quarter include a pre-tax charge on the early retirement of debt of $71 million or $0.26 per diluted share. Excluding this charge, adjusted earnings are $0.85 per diluted share on a non-GAAP basis.

The highlights driving both quarterly and full-year results are the fourth record year in a row of pork group operating profits, led by record-setting fresh pork results and solid packaged meat profits, even in the face of high raw material cost. The second highlight is the turnaround in hog production from large losses to strong profits. The signpost marking the conclusion of fiscal 2011 indicates we are well down the road, transforming Smithfield Foods into a different Company, with different drivers of success.

We are on our way to demonstrating branded packaged meats' pricing strength. We've created a consolidated, highly-competitive manufacturing cost structure. We've moved away from a pure commodity corn play, reducing our annual exposure by 100 million bushels or 40%. We're improving our hog production operations to transfer our cost structure into a competitive advantage. We have reduced debt from $4 billion to $2 billion over the last three years, creating a fortress balance sheet and on the way to lowering interest expense by $100 million annually. Now, for the details.

Consolidated sales for the quarter increased 7% while full-year sales increased $1 billion or 9%. All segment sales benefited by dramatically higher unit sales values. Fresh pork volume was down for both the quarter and year, closely reflecting closure of our Sioux City fresh pork plant a year ago. We project our fresh pork volume in 2012 to be equivalent to the past year. Packaged meats volume for the quarter and the year were down 2% and 4% respectively. We believe we are close to an inflection point in packaged meats volume, as Larry alludes to.

We continue successfully to rotate out of lower-margin private label and into higher-margin branded products. This has lowered volume but we grew in several key product categories like marinated fresh pork and Kretschmar Deli items. While our volume was down in Q4, we believe we gained market share versus key competitors. We demonstrated pricing power in the fourth quarter compared to a year ago, with raw material cost increasing 14.7% over the same quarter last year, we were able to increase our prices 14%, recovering 95% of incremental raw material cost of goods sold. We believe we've begun to gain momentum, and forecast packaged meats growth of 3% to 5% for the full year.

Pork operating group profits achieved record-setting performance. These fresh pork operating margins per head were $17 and $15 for the quarter and full-year, compared to $1 and $2 respectively a year ago. Margins have declined significantly from these record levels; however, we are optimistic that strong export sales and a reasonable domestic live pig supply/demand balance will produce margins at the high end of the normalized range of $3 to $7 per head. Packaged meats operating profits were $0.12 and $0.13 for the quarter and full-year, down $0.02 and $0.04 from the prior periods. While these margins are down from record levels last year, we are pleased we achieved target margins on much higher raw material costs. We believe we can maintain our operating margins in the range of $0.10 to $0.15 per pound in fiscal 2012.

Hog production operating profits were $21 per head for the quarter and $14 for the full-year. These results represent improvements of over $40 per head for both periods. Higher corn prices will begin to eat into these margins as we move through the coming quarters; however, we had a reasonable position in corn hedges that will help control raising costs. We expect hog production to be profitable but likely at or below the low-end of the normalized margin range, between $10 to $15 per head EBIT.

Hog raising costs were $57 per hundredweight in the fourth quarter compared to $53 per hundredweight the year before. Full year raising costs in 2011 were $54 per hundredweight. We expect EBIT hedge-adjusted raising cost to rise on a quarterly basis, with higher corn prices from the low $60s early in the year, and flatten out into the middle $60s by mid-year. Results for the international segment for the full year were driven by improved Animex performance in Poland, and strong profits in Mexico offsetting reduced profits in Romania and the Polish hog production.

The lower results in the quarterly corporate segment were impacted by higher levels of performance compensation, while the full-year increase reflected the impact of the Patrick Cudahy insurance settlement. Improvements in equity income of affiliates reflect stronger profits in Mexican joint ventures, and better annual results in Campofrio year-over-year, but Campofrio had a small loss in Q4. Depreciation in Q4 and the full year were $57 million and $227 million respectively. Full-year depreciation for fiscal 2012 is projected to be $241 million.

Full year capital expenditures in fiscal 2011 were $177 million, substantially less than depreciation for the third consecutive year. Capital expenditures discipline in the three tough years have significantly under spent depreciation. Pent-up capital projects offer significant opportunities to grow our branded packaged meat and export business. CapEx in fiscal 2012 is presently pegged at about $250 million, but major capital expenditure projects could have a modest impact on incremental spending in the second half of the year and in fiscal 2013.

We expect our full-year 2011 estimated tax rate to be 31.2%, a tick up from the 30% to 31% offered in our last quarterly call. The resulting Q4 quarterly tax rate is 31.9%. We expect our 2012 full-year ETR to be between 32% and 33%. A year ago, we described our plan to reduce debt by $1 billion and annual interest cost by $100 million in 24 months. We had just come off of a fiscal 2010 interest expense of $266 million. In fiscal 2011, interest declined to $245 million and interest expense for 2012 is projected to decline again to $185 million.

Fourth-quarter interest expense was $51 million, down $17 million from the same quarter a year ago. The impact of the final payoff of our 2011 bonds in Q2 and lower interest costs and expense resulting from our new credit facilities will bring the quarterly interest savings to $25 million or $100 million annualized, several quarters early. The balance sheet story is highlighted by debt reduction of $944 million during this last year. We ended the up year with over $375 million in the bank and no borrowings on our $1 billion ABL facility. I'm pleased to report that last week, we replaced our ABL facility with two new credit facilities led by Rabobank, providing $1.2 billion total short-term capacity, an increase of $200 million.

Our cash has grown too. Today, we have balances of $450 million and total available cash and liquidity of $1.5 billion. The new three and five-year facilities offer dramatically lower interest rates and expenses with much more flexibility. We've dramatically smoothed our future maturity towers, leaving total debt maturities in each of the next two fiscal years of only $150 million per year. Our current balance sheets, with dramatically lowered debt levels, lower interest expense, and stronger EBITDA have dramatically improved our credit metrics. Net debt-to-capitalization ratio at year-end was 33%. Debt to EBITDA coverage, 1.8 times, and interest coverage at five times.

Oh, what a difference a year can make. We are respectful that we are sitting on a lot of cash and it is imperative that we employ it to create and enhance shareholder value. It will take several avenues to include packaged meats capacity expansion, required debt reductions, enhanced level of tax-deductible pension contributions, and some likely level of stock repurchase.

In conclusion, financial performance in fiscal 2011 was outstanding. I thank all Smithfield associates for their hard work over the past three years. More exciting than record performance in the past year is the new positioning of Smithfield Foods. We are extremely focused on building our branded packaged meats business. We have highly competitive cost structures in all elements of our enterprise. We've reduced commodity exposure to corn by 40% and are on track to reducing raising costs $90 million.

We have the strongest balance sheet in memory. We've lowered interest cost, pension and work comp expense, we have a strong cash position to help the Company grow and lower costs and improve shareholder value. To beat fiscal 2011 results will take a ton of hard work and a bit of luck from the markets, but we have the tools, resources and organization to execute and make it happen. We look forward to strong results again in 2012. Thank you very much for your time and attention. Now back to Larry.

Thank you, Bo. I hope you took from that an awful lot of information and details there that virtually all of that was positive, so I think we're trying to be more transparent and give you more information in terms of how to fill some of your models up and some of the detail, but there's a lot there.

Looking forward, the future looks very bright. The fundamentals are very strong for the industry, I think. Clearly we're up against, as Bo said, some strong comps, particularly on the fresh pork side of the business; however, as we indicated in the press release, we are expecting our packaged meats business margins to actually improve from the levels we just reported, so we believe that part of the business still has some upside. On the fresh pork side, the margins early on have been somewhat lower, although I'm not the least bit worried so much.

We do have big comps up against us, but the future is still in front of us. We were at this point last year, I certainly had no idea that the fresh pork business would turn out to be as good last year as it did, had you asked me the same question I have a better outlook this May, or now I guess it's June, this June, than I did last June, so we'll have to see. As Bo said, a little bit of luck from the markets which could clearly be the result of these export markets blossoming and continuing to be as robust as they are, could easily have the impact that it had last year, so I'm very optimistic.

We are focused, as Bo said, on growing this top line. That is a focus of the Company. We're adding marketing dollars to make that happen. We believe that will translate into a better bottom line on the branded business. We believe our brands are sticking. We believe people are rotating to our brands. If we lose some of the private label, oftentimes we pick it back up through one of our brands, so that part is extremely good.

The export markets are booming. I'm sure you're hearing that from everyone else. The interest level, particularly on the Asian side, is very robust and that looks very good as I look forward, and even to the business side, Bo made the comment about our cost structure. We still see enormous opportunities to continue to improve that cost structure. As Bo indicated, we have pent-up demand in terms of CapEx, that we believe we can put in place to further enhance our competitive structure on the cost side. That part is extremely promising on both fresh pork, packaged meats, and even on the international front. All three fronts have opportunities even with these results as we critically evaluate those, we see significant opportunities in each one of those areas.

Finally, I think you saw this morning that we issued a press release indicating that our Board has authorized a $150 million stock repurchase authorization. We are bothered by the level of our stock price. We believe, as many do, that our stock is undervalued. We believe that we are delivering a solid performance year after year in our pork group, and we believe the market is not fully understanding that, and given the excess cash that we have around us today, we believe one of the uses of that cash would be to repurchase some of those shares. We believe that's smart for you, and should enhance you as a shareholder.

We are focused on driving our stock price. We realize that's the reason you bought the stock, not to see us report record earnings but see your stock price still up. We understand that very clearly, and I assure you I'm focused on that, and this gives us an opportunity to buy some shares back opportunistically, and improve the accretion calculation associated with it, along with some of the capital projects Bo talked about, pension reductions and others. That is not to say we aren't looking at the others, but we think we have good cash flows, and we think we have a lot of opportunities to help you as a shareholder.

I would tell you on the ethanol front it looks like the weather continues to change. I see the sun rising on the other side and it looks like a no ethanol subsidy world in the future. I hope that the pressure continues in Washington for the voice of reason to come shining through. These do expire the end of December. I guess one vote failed, but it was certainly a shot across the bow. I've been active in trying to be out there with our strong opinions. I think it's not good policy. It's not good debt reduction policy, and I hope the guys with the white hats win, and we'll benefit from that and I think it's good for agriculture in this country as well as around the world.

Finally, we don't make predictions and we're not out there forecasting earnings, but I think we're in a very good position as we go into the early part of fiscal 2012 to have a very good year, and I look forward to reporting to you each of the next quarters as we go forward. With that being said, Keira, we'll open it up for questions.

Thank you, Larry. In order to provide the 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 lines.

(Operator Instructions). Ken Goldman from JPMorgan.

Good morning, everyone.

Good morning, Ken.

I appreciate that for competitive reasons you don't want to give too much detail on your corn hedges but you did seem fairly optimistic there, at least on your ability to maintain profits if corn goes up. Any detail that you can provide us on the level and/or the duration of some of your hedges? That would be helpful in terms of modeling.

Ken, we don't like to give so much of that, but we think from a corn standpoint, we've got something resembling a 50% hedge against our grain for the year, at prices well below current market. How about that?

And can I assume that's mostly front-loaded in the year?

You could say it's more front loaded but I wouldn't be so much on that. We've got some protection for the whole year.

I think, Ken, this is Bo, focusing in on our cost structure, it will start to reflect higher cost of corn going forward, but I think I'd indicated we'll probably have a low to mid [$60s] price as we start off the year and then moving into the mid-[$60s] and should be able to hold it in that range, assuming that things don't run away, but if they do, as Larry points out, we have pretty good protection base here so we feel pretty confident about our position.

Thank you.

Christine McCracken from Cleveland Research.

Good morning, Larry, Bo.

Good morning.

It's an early morning for you, Christine. Thank you for getting up.

Oh, no, it's okay. Larry you mentioned you are not seeing expansion in the hog herd, but it seems like with grain prices now looking to be up for another year, we could start to see some liquidation. Wondering if you're seeing anything like that, and what your expectations are next week for the hogs and pigs report.

Well you see the sow slaughter just like I do, Christine. You've seen the reversal in the sow slaughter to moderate numbers. They aren't all that significant, but they're certainly there, and I'll tell you, with corn going where it is, and the working capital problems and Bo can speak to that as well as some of these farmers have, I would not be at all surprised, and in fact I saw something even today on some export, that's actually outside of the country on some of the potential declines that they're talking about happening outside the United States in Europe and in China, that could be very compelling information, so I know one thing. I don't think anybody in the world would think about adding much of anything, and if they have to finance these rates and costs, regardless of whether they can make money, they just have to finance them. I could see, I haven't heard of anybody that I'm aware of exiting the business Christine, but I think that's a very real possibility now once again.

Great, thanks.

Christina McGlone from Deutsche Bank.

Hello? Can you hear me?

Certainly.

We can now.

Okay, good. Thank you. I guess my question was on the packaged meat side. So Larry and Bo, when we think about the top line are we starting to get finished with the rationalization process or should we be modeling in growth? And then also, the normalized margin range that you guided to, does that include that bump in marketing?

If I can address that, we're looking for modest growth in the 3% to 5% range. We have had some particular product categories where we have seen significant growth, and some very good margin branded business, Kretschmar Deli is one, marinated pork would be another. The margin structure we described in a normalized range of $0.10 to $0.15 would include the marketing expenses that Larry referred to, yes.

Okay, thank you.

We look at margin as everything except what's operating profit so it's everything except interest.

Thank you.

Ryan Oksenhendler from Banc of America.

Good morning, guys.

Hi, how are you?

On the fresh pork side, the number that you guys gave for the normalized range of the year, do you expect to average that for the year at the high end of the range, or do you think, as margins kind of --?

I think it looks solid. Bo can give you the range that I think we're projecting out there but it's early in the year and certainly this is not the time of the year when fresh pork is at its best, so it's a little early to start telling you where we're going to be relative to our fresh pork margins, but I think the fundamentals are very good, so Bo, where do we have them?

We have indicated a range of $3 to $7, Larry. Obviously, we're coming off of some absolutely phenomenal numbers in this current year. And I think, as we both have explained on several calls over the past 12 months, it will likely revert to the normalized range. We did see some compression coming into this quarter. We have frankly been very pleased with the results we've seen so far, which would be towards the high end of the range I just described.

That's right. The early part of this quarter is that we are on the high end of that $3 to $7 range in spite of the fact that the margins have fallen off, so it could go easily much higher than that, particularly if there's any export activity that we think will happen, these margins could pop-up very nicely.

Thanks a lot, guys.

You're welcome.

Tim Ramey from D.A. Davidson.

Good morning. Congratulations. Larry, I was cueing up a question just sort of on your last statement there because I think the consensus and your comments would indicate we sort of revert to the mean, but it wasn't that long ago, 2006 or 2007 we were seeing hog farming margins in the mid to high teens. What type of an export shock would it take to get you there? If exports were up 25%--

Oh, my goodness gracious. I just fell out of my chair. I think you can put that as one hurdle if you jump that hurdle, I think you made it. I don't think it needs to be nearly that good.

Larry is going on vacation for the rest of the year.

But Tim, I'll tell you. The USDA and the MEF just came out with the data for April yesterday, and we agree with all of that data. I think double digit increases in exports is very doable for this industry. I think for the month of April from our side, 27% of the production in this industry went outside of the country and Korea just agreed to extend the tariff relief in terms of imported product.

I don't need to tell you what the price of pork is in China. We are at levels above where we were when the giant orders came in a couple years ago. We're at or above that level in China today, and so the telephone is active, and so that's why I think there's a lot of upside to these fresh pork margins that I realize that May and June's margins don't equal last November and December and January and February and March; however, they could easily get back there pretty darn fast. Do you agree with that, Bo?

I feel we're seeing a higher Chinese market than we saw a year ago. We have absolute evidence of liquidation in central European Herds, and conceivably western European Herds, which are our major competitors in Asia so all that's positive for us.

So Tim I just answered your question, what kind of a shock would it take, I actually think if the kind of information that's out there today comes to pass, I think you could be there.

Terrific. I like that. Thanks.

Farha Aslam from Stephens.

Hi, good morning.

Hi, Farha.

Continuing on the line of export questioning, two questions, one, you've recently announced an agreement for exploring opportunities in China, and just when you look at China, do you believe that they're going to buy, could you give us some read on what quantities China could import and importantly, the quality. Do you think that they would be willing to buy muscle meat from us rather than just offal, and then also on the export front, recently Russia banned several Brazilian pork facilities and if the US processors are getting any benefit from increased exports to Russia.

I'll take the Russian question first, because the big point is China. Farha, Russia is one of those you take it when it's there and you deal with when you got it. That's a very difficult market, so I don't look to Russia as some fundamental change or any driver other than just an opportunistic sale to be there when you can do it. China, on the other hand as you say, we have announced something which is to look into the distribution system and cold chain and that's coming from both sides, with a Company out of China, where we want to continue to explore opportunities to continue to grow our business in a more serious way as opposed to a trading environment in China, and so that will come over time.

I don't know that I'll look for anything immediate from that; however, you know the relative size of China compared to the United States. It's 5 times the size of the US market. I don't think it's any question that they have got enormous pressures inside that country, and I know that food pricing is a huge concern and any movement by China could have a gigantic impact on the United States, as it did in the past.

We are seeing and in fact we have received muscle orders from China, as those were in modest quantities at this point, so your question, could there be muscle meat orders into China, there are muscle meat orders into China today. They are not of the magnitude we saw several years ago, and so I don't want so go out and project where this might be except to tell you that the market is very active and I could see the need. No easy question about the need, and I would not be surprised.

But with the entire Asian market, not just China, but you've got China, and you've got Japan, you've got the Philippines, you've got Taiwan, you've got Korea, all of those are opportunities for very nice increases, and there is activity in all of those, so I think all of that and it's not just, the offal items we sell on our routine basis are already in there, and double-digit increases, so that's already been part of the base, but the muscle meat is the opportunity that's now expressing itself and yes, I think it could easily be there.

Great. Thank you very much.

You're welcome. Ken Zaslow from Bank of Montreal.

Good morning, everyone.

Good morning.

Can I just talk a little bit I guess a little bit about the discussion on cash usage? What is the timing where you expect to be buying the stock back? How opportunistic, and second thing is, given that you've actually expanded your credit line, and it sounds like you're pretty positive on the year and the other thing you said was, we'll continue to assess the Campofrio and your western European opportunities, so what do you need to see in the western European markets for you to go back into the Campofrio deal and it sounds like it would be more debt than equity. Can you just talk about those kind of general pieces of the cash flow?

Well, I think that we would announce the authorization this morning and I'm certainly not going to play my hand on this call in terms of when we're going to buy the stock, except I would tell you today that I think the stock is, we'll see how you react to this call, but I think the stock is severely underpriced, as anything close to the levels we're at so we could be in the market on a share buyback program very quickly. And so that's a signal to you.

The other side is we have opportunities on the Capital Expenditures side and we're looking at funding opportunities in the pension area that would be very we think are very beneficial to shareholders. Now to deal with the Campofrio situation, Campofrio was going to be a combination of debt assumed of share issue, use of cash, and potentially a debt issue there, in terms of financing for that. Ken, I think it's going to take some time for this western European market to process what's going on over there. In fact the world seems to be getting worse before it gets better.

I don't see anything in the near term that sends me back to the table to start doing a deal with Campofrio again, so I don't want to give you a timetable that you're going to call me back and say Larry, you said that on the call, but the fact is, there's a lot to be resolved in Western Europe and it's not Campofrio. It's not the result of Campofrio. It's the result of the bigger economies, multiple that they operate in, and I think that could take some substantial time before those things get resolved, before we would be serious about looking at that again, so I think we'll be looking much more to the other items that Bo outlined in his discussion, before we'll be talking about Campofrio again. Does that help you?

That is exactly what I was looking for. I'm very happy that you're not going to go into the Campofrio deal, for whatever that's worth, so thank you.

I think that came across pretty clear.

Thank you.

Stephen Share from Morgan Joseph.

Congratulations.

Thank you very much.

I want to talk a little bit more about packaged meat and specifically the 2% volume decline we saw this quarter, was that planned, and then I guess my bigger question is, are you starting to see any sort of pushback from consumers about the higher packaged meat prices right now?

I'll tell you, and then Bo can have his comments as well. I have predicted over a year ago that pricing was going to go up, given the margins in this business, it had no choice, and pricing has gone up. I think we're having a much more intelligent discussion with our customers. No one likes to see price increases and we don't like them. They've had their, I think -- we had margin compression that we would offset through cost reductions in our plants, and then the retailers have seen margin compression themselves, and they had to raise prices.

I think there's certainly consumer reaction to this, and you see it on the evening news now, but in large measure, food in this Company is still relatively cheap and we are seeing some rotation, but not to anywhere near the degree I thought it would be, and so I'm pleased with the way these prices have gone through the market. Again, I think it's an understanding. No one wants to push through price increases because it hurts everyone's business, but it's the reality of life, if corn is going to be $6 and $7, we're going to have higher-priced meat in the grocery store.

That's a reality and I've made the statement publicly if we could see corn come back, and these ethanol subsidies reverse, I think you'd see the price of meat come back down, so it's a direct correlation here, and I think retailers understand that and consumers are accepting, and I don't know that they're at all pleased, but they're accepting it just like they are accepting $4 gasoline the second time around. Bo?

I think one observation would be you never like to go into a period forecasting any decline in sales; however, as Larry describes, it's a fact of rotating out of some of these lower margin items as the consumers have pushed back on their desire to pay more money for certain things. I think the thing that gives us the greatest sense of optimism, even when you look at the 2% decline in the fourth quarter is the fact that some very key areas that we're putting a great deal of emphasis on, Kretschmar Deli for example, marinated pork for example, both grew in their categories. We believe even though we lost volume, that we took share in those very, very key categories versus our competitors and that's a very important point for us to make, and I think as I mentioned before, I think really represents an inflection point in our packaged meat strategy at this stage.

The other thing I would tell you is the Smithfield brands are not priced at the top end of the market. We are trying to reach that 80% of the consumers who are what we call the value conscious consumer, so we are getting some of that rotation down and that our brands are good value brands, and so when the consumers in some cases are rotating into our brands, we are the recipient of some of this rotation, as I explained with a number of these categories that are up, our Smithfield retail branded bacon business up 26%. That has people rotating to our brand.

Those comments, as you rotate, as you're in the deli, they are rotating, I won't use any other names on the call except they are rotating to our brand. We're getting the rotation. The deli category is up, full category is up. Ours is up more than the category, so I'm feeling very good about where our brands are positioned in this environment. Our brands are positioned right, so consumers see our brands as a value brand.

Do you expect this positive mix rotation to be a theme throughout fiscal 2012?

I think it's going to be a theme for the industry, and I think some of the things that gives us again additional optimism is with a very high degree of cash on hand and the fact that we have pent-up CapEx projects, we're seeing some great opportunities to add capacity in branded packaged meats area, that will give us more capabilities to expanding both volume and in the pricing categories we want to be in.

Thanks.

Diane Geissler from CLSA.

Good morning.

Hi, Diane.

How are you?

I'm good. Thank you. Just wanted to ask on the hog production, just a point of clarification, Bo, on your comments about the raising costs. The low $60s to mid $60s would exclude any benefits of hedges?

No. It would include hedges.

Would include hedges. Okay, and then I guess could you refresh me on what your current raising levels are, like how many hogs you are currently raising and then just one follow-up after that.

We're right around 16 million hogs per year, Dianne.

Okay, and do you see anything in the industry that would, you would suspect there would be any expansion any time soon? I can't imagine there would be, but--

We see no buildings going up out there. We do, you may from time to time, particularly in the midwest see a producer buy somebody's operation that may be in financial difficulty, so there is some consolidation that is taking place but we don't perceive any expansion. I think a couple of things to note, as Larry mentioned, we've seen, I think it's 6 out of the last 7 weeks an uptick in sow slaughter. Not huge although some weeks have been fairly decent, but it certainly is not portending any expansion and I think we've seen some anecdotes coming out of some of the folks where I'm playing and others that have indicated that they think that some of the increase we're seeing in the immediate slaughter levels could be the reflection of additional kills coming into the market and not being put into the herd, which would represent a stabilization particularly, certainly not any expansion going forward, so those are 2 optimistic things I think from a domestic balance perspective that we're seeing that give us a good deal of optimism.

Okay, great and then I think you said within that group, you've realized cost savings of around $30 million, you expect something similar in fiscal 2012? It's kind of an ongoing process I realize, because of the life cycle of the animals you're moving in and moving out. How much more is there in terms of your restructuring/rationalization that you have been working toward over the last few years?

We are well under way in that process, as I appreciate you're acknowledging that it is a life cycle process within the pig, so as we try to improve health, as we try to improve flow, those 2 take a few years to get resolved. What Larry had mentioned was that we have had $30 million worth of improvement that we can look at definitively hitting our bottom line in the last fiscal year. We're looking at that plus another $30 million for the current fiscal year that we're in 2012 and ultimately, we believe we'll have $90 million or about $0.02 a pound in benefit. I'd love to say it's going to happen this year but I think from a conservative perspective, we're really only looking at about, we're plugging in about $60 million in incremental improvement compared to where we were when we started the program.

And Diane and Bo, we had indicated that we had some charges we had to take as a result of write-offs and closing the farm. That's all been taken and as well we had CapEx that we were going to have to put forth for this. A lot of that has been spent, so a lot of the, we're well over 50% on the paying side and we're under 50% on the benefit side if that's the way it to say it.

Okay, terrific. Thank you so much.

Ann Gurkin from Davenport.

Good morning. Congratulations on your record results.

Thank you, ma'am.

I just wanted to ask a little more about the consumer reaction to pricing. I know you discussed this a little bit but in the past when we saw prices go up we saw consumers switch to other proteins. Are you seeing that trend occur? Is that something we should be concerned about?

I don't see a lot there. I'm not seeing much of that, Ann. Obviously you have the concern about chicken, because chicken is cheap, but I'm not very concerned about that.

I think we're waiting for the thing that everybody else is waiting for, and that's the people in the chicken business to start some type of meaningful cutback, which could probably help everybody return to the business.

Right. We wait for that too and then at your Investor Day you talked about the expansion into the deli meat. Can you just give us an update on how that expansion is going?

Yes. I think we just reported to you, the Kretschmar brand is our brand and that brand is up 14%. Our deli business is up 5%, and that represents about 6% of our sales, so it's a very sizable category. We are the second, our brands and our business combined, we are the second-largest deli company in the United States and so that's extremely promising. We saw double digit increases here last year and again this year and I think that category, the category is growing a bit.

We are far growing faster than the category and our brand is doing extremely well, so that is a business, I'm very optimistic about and we are in the midst of expanding some of our dry sausage capacity to service that end of the business along with the food service side. That all looks very good for us, and that's good margin business, good stable, steady business. Diane, that's what gives me so much comfort in terms of how this business is changing and we're putting money behind that both marketing and manufacturing and the brand is growing, and the category is growing.

Great. Thank you all very much.

Brett Hundley from BB&T Capital markets.

Good morning. This is actually Heather Jones.

Hi, Heather. How are you?

Good. Congratulations on the quarter. I just had one real quick question. Clearly, your optimism on your hog production group is a function of good hedges, but also wondering if it's a function of you having sold forward a significant piece of your hogs at higher prices?

If you look at the hog side, we have left a considerable amount of opportunity, I think, for upward price movement in that equation, but if you just look at the future strip out there, you can be pretty optimistic, matching up with what our raising costs were to project profits for the balance of the year, so I don't think it's really a stretch in terms of where the markets are today in terms of the future strip to look at profitable results going forward.

I think where we think our raising power will be and where the futures markets are today, we're certainly not hedged as much on the hogs as we are on the grains and we believe the future, if anything there's upward potential in this hog market on the futures, but the futures markets compare with where we think our raising costs are, we're pretty comfortable with what we think the future looks like even without the hedges.

Great. And do you expect 2012 to be meaningfully better on the international piece, especially relative to what happened in Q4?

I think certainly, I guess I'm not expecting our Polish business, I'm actually expecting that to be down, Heather, a little bit. They're feeling the same pressures Campofrio is feeling from the raw material increases. We've got opportunity on the Romania side and so Campofrio has got some bad comparables in terms of the quarter, but that has to do with some charges going through the quarter. I mean, it's very possible. Our international business could be better next year. That's very possible.

Okay, thank you and congratulations again.

Thank you.

Operator, we have time for one last question, please.

Reza Vahabzadeh from Barclays Capital.

Good morning.

Good morning. How are you?

Good. On the balance sheet, obviously you've been focused on deleveraging last 2 or 3 years and reducing interest expense with a lot of progress on that front, so now you're announcing the share repurchase program and just trying to understand your approach to the balance sheet going forward. Is it going to be more focused on share repurchases, or a more balanced approach with some share repurchases but still a strong balance sheet?

We will always maintain a strong balance sheet, Reza. In terms of debt reduction, we have relatively little maturities. I think I mentioned over the next 24 months, really only about $300 million worth of maturities since we extended out our short-term facilities, as well as we pushed out $200 million worth of Rabo term loans that I think we pushed those out another 2 years from 2013 to 2015, so we don't have big cash needs for debt.

At the same time, there's some huge premiums associated with those, so the attractiveness of buying debt back in is not great, but frankly, I think we're really looking at shoring up the balance sheet in terms of the buyback process and we feel very confident that we'll continue with the strong balance sheet going forward. We don't really want to, we will move this year I think to reduce some of these cash balances because particularly with the improved liquidity position we've got from our short-term facilities, there really isn't the need to carry the quantities of cash that we have in the past and just makes shareholder sense to reduce that.

But how do you reduce your interest expense by another $50 million without addressing some of those debt pieces?

Reza, when you say $50 million, we've reduced debt probably close to $80 million on a run-rate basis without the reduction that we're going to have this summer of the $70-some million in 2011 notes we'll pay back and we get some substantial benefits in rates and expenses associated with the new short-term credit facilities that amount to millions of dollars per quarter.

I think that the new credit facility alone is going to yield a $15 million a year in reduced interest cost. So that just the fees in the associated cost there, that's reducing it some $15 million, I think that's right.

Yes, and in addition to that, when I mentioned we pushed out the Rabo note we had almost a 200 point reduction in interest expense on that component as well.

So that's $4 million there. Those 2 together is almost $20 million, just by refinancing the credit facility and pushing the Rabo $200 million term loan forward, that's just rate production.

I'm very confident in being able and I think we'll probably get there by the end of the first quarter. We will achieve the run rate reduction of $100 million lower interest cost.

Got it. Thank you.

Operator, we'll turn the line over to Larry for some closing remarks, please.

Thank you very much for listening this morning. I realize that you guys got on the call early. We tried to plan that early for your benefit. We have had a very successful year. This Management team, I can commit to you in spite of the record year and the record four straight quarters, this Management team is highly focused and sees lots of opportunities. We are up against tough comparables.

I'm not going to make a projection but I'll tell you, I still see a lot of sunlight in front of us and the opportunities are there. Fresh meat may not afford us the same opportunities as it did this past year, but I see other opportunities from international to operational improvements to margin expansion, top line growth, all of those, as well as the things Bo's done on the finance side, the lower interest costs another $20 million on top of the run rate starting to hit. We've got a lot of nice things, a lot of nice energy behind us that I think will benefit us, and we'll see where it comes out, but as we said in the press release, I think fiscal 2012 as early as it is in the year is shaping up to be a very nice year we'll be proud of. Thank you very much for listening this morning.

Thank you.

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