Smithfield Foods Inc (SFD) 2012 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Smithfield Foods fiscal 2012 first quarter earnings conference call. At this time, all participant lines are in a listen-only mode. Later there will be an opportunity for your questions. (Operator Instructions) As a reminder today's conference call is being recorded. Digitized replay will be given at the conclusion of today's conference and I'd now like to turn the conference over to Keira Lombardo. Please go ahead.

Good morning. Welcome to the conference call to discuss Smithfield Foods fiscal 2012 first quarter results. We would like to caution you that in today's call, there may be forward-looking statements within the meaning of Federal Securities laws. In light of the risks and uncertainties involved, we encourage you to read the forward-looking Information Section of the Company's 10-K for fiscal year 2011. 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 Company's financial results. 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 everyone on the call. Bo and I are sitting in Boston, Massachusetts, for a back-to-school conference as you've probably seen we've made disclosure of; and it's pouring down rain outside, but I can tell you from where I sit, the sun is shining very brightly at Smithfield Foods.

I am extremely pleased with the results that we just published this morning. I hope you had an opportunity to pour through the earnings release. There are some very important highlights that we've pointed out front. A lot of words record in those earnings, and I'm extremely pleased with the job this Management team has done this first quarter as we start our new fiscal 2012.

I hope you saw the earnings at $82 million or $0.49 a share compared with $76 million or $0.46 a share last year. I'm sure you took note of the adjustments, particularly a litigation charge that we took during the quarter, all totaling $0.20; and more on an adjusted basis, the earnings of $0.69 compared with $0.46 represents a 50% improvement over some strong results for last year's first quarter. And I also remind you that last year was a record year for the Company.

This is the fifth straight record quarter for the Company. We are starting off this new fiscal year sort of coming out of the box very strong in almost every segment of the business, exclusive of our International business which certainly struggles a bit as a result of the recession going on in Europe.

If you look deeper into the numbers, the Pork segment numbers are just outstanding. There's nothing short of that, both the Fresh Pork and the Processed Meats. Our Pork group is reporting $136 million versus $113 million. That's a 20% improvement over extraordinarily good results last year; and again, it's not just 1 segment. We did have a bit of a favorable benefit in last year's Fresh Pork numbers for about $8 million the way hedges were accounted for. So our Fresh Pork numbers, even year over year, are very comparable to last year's Fresh Pork numbers in spite of the fact the live hog prices were up $11-some hundredweight.

I think many of you know that the summertime is not a good time of the year for the Fresh Pork business; and so, given the seasonal effect, combined with rising live hog prices, I'm extremely pleased with the results on our Fresh Pork business. I'm sure you all know that it has a lot of impact from the export markets.

We are benefiting very nicely from those markets, particularly the Asian markets are very strong, very robust, and look to be very robust going forward, so I am optimistic on the Fresh Pork side of this business. And in fact, we're moving into a seasonally good period of the year so that part of the business, combined with the operating efficiencies that the Management team is doing in a number of the plants, that part of the business is just excellent.

Clearly the part that you know I focus on every quarter is the Packaged Meats business; and this is more than a shining bright star. This is the big sunlight here that we've been working on now for 5 years that I've continued to talk about every quarter for 5 years is the progress this Company has made on the Packaged Meats side of the business.

To be reporting $101 million comparable to $67 million last year or a 50% improvement, which equates to $0.17 a pound compared with $0.11 a pound last year, is nothing short of stellar for this Management team. It's not all about sales price and such. It has to do with the way we're running our marketing programs and the way we're running our plants. That is benefiting our bottom line in this end of the business.

George Richter and the Pork group team has done an outstanding job quarter after quarter and year after year in realigning the way in which our Processed Meats and Packaged Meats business functions both from the logistics, from the manufacturing side, the sales side, and as we begin to focus more and more and more on our branding strategies, it is showing up in the bottom line. I don't think these are one-off quarters.

We've now got about 15 of those behind us so I don't think our Packaged Meat success is the result of some luck. In fact, I think others have been reporting how their Packaged Meats business is struggling. We are pleased with our Packaged Meats business. In spite of the fact that raw material costs have moved up, our margins have continued to move up.

In terms of the breakdown of the sales volume, we are very pleased with the overall sales volume being down 1%; however, our retail branded volume, which is on our 12 key brands, where we are focusing our efforts, that business is up 3%. Our Foodservice business is a little soft. I think others have reported there's nothing special in that except that the whole foodservice industry is suffering a bit and we are a recipient of that since it's a sizeable piece of our business.

In fact I think the National Restaurant Association just published something recently indicating that the sentiment of the restaurant operators is the lowest it's been in nearly a year, so there is some softness on that side of the business and we've seen that of late. I would tell you that our brands are in the right place. We're value-priced brands. Consumers are trying to stretch their dollars, and our brands are right where those consumers are looking to expand their purchase for the dollars they spend.

We are right on the strategy I've been talking about for 4 years. I would tell you, embedded within that, even at that, we still have increased marketing dollars going toward our brands; and we're still expanding the bottom line as well as the margins. It is a terrific story.

I hope you have an opportunity to focus on it in terms of what the sales dollars and the volumes are. That's part of a trend that's been here with us for a while. It's the focus of this Management team. It's the reason we rationalized plants several years ago to put ourselves in a position to utilize our capacity. We are continuing to evaluate some very low margin business and we are rationalizing out that low margin business and putting our dollars behind the brands that we know will carry us forward.

And not to our surprise, but we're certainly pleasantly pleased with it, but the fact that our brands are holding and our brands are pulling, so in this environment as we continue to market behind that, we're finding there's a lot more behind these brands than we had previously thought; and our brands continue to expand. Even in an environment where many of the categories that we compete in are not growing, our branded business is growing.

Turning your attention to the Hog Production side of the business, you do see a modest comparison with last year. That does include, I'm sure you saw in the Press Release, that the results were negatively impacted by a $39 million charge related to the Missouri litigation suits by way of background when we bought Premium Standard Farms back in 2007. PSF was defending 275 separate but related nuisance suits in the state of Missouri. Almost all of these suits have been brought by the same attorneys on behalf of clients living close to those PSF farms.

Over the last few weeks, a number of things have happened that have impacted our view of these suits; and at the same time, we have created an environment in which we may be able to get this behind us. We won a defense verdict in one case and lost an appeal in another.

In late August, a new favorable nuisance law took effect right at the end of August, one that is more balanced and supportive of Agri business. Partly as a result of this change in the law, we have also made substantial progress in settlement negotiations with the other parties, so much so that we now believe a global settlement with these plaintiffs is probable and for that reason we have increased our reserve to cover this.

If a global settlement is reached, we will be seeking recoveries under various PSF insurance policies and believe we could eventually recover a substantial portion of any settlement payment. Now, since this is pending and outstanding litigation, that's about as much as I'm going to say about this. I'm optimistic that we will get this behind us soon; and I'm optimistic we have our accrual where it needs to be, but given the nature of this litigation, we're not in much of a position to give a lot more color on that, except to tell you that it relates to several years in the past and recent changes have forced us to reevaluate what our accrual should be.

So making an adjustment for that $39 million as well as a very small impairment charge we also had, our Hog Production business results were up very solidly; and I will remind you that we have a cost improvement initiative underway at Murphy-Brown that we have projected to be a 3-year plan to reduce our cost by some $90 million. We are just about halfway through that process at this point and I would tell you that we are a little over halfway through the benefits and have taken the vast majority if not all of the charges, to the P&L related to that so we should be only on the benefit side of that and I am fully confident that Jerry Godwin and his group will deliver that $90 million probably ahead of the 3-year schedule; and certainly I don't expect any surprises on the negative side in terms of charges.

The big issue I know you're all concerned about is where you're going with the grains. We all can see where the futures market and the cash market is on the corn market. We're all aware that $7-plus corn is around us. $8 corn could be just around the corner from us. We have made the comment on many previous occasions that we have got substantial hedges in place to protect us against a run-up in the corn market.

If you look at the results for the quarter, you're probably pleasantly surprised by how favorable they are to probably what your models show. Those are the result of those hedges we put in place some substantial time in the past. As well, we have hedges going forward. So should $8 corn arrive and more than $8 corn, I hope to tell you that we will be one of the last to pay it.

If it stays at $8, we will have to pay $8 corn, but it will be substantially into the future. I think we're in good shape, very good shape, for the rest of this fiscal year in terms of our corn positions, so I'm not too terribly concerned about what happens to the corn market over the relative near term. That's the positive on that; that should limit any expansion going on. We don't see any expansion. And in fact, if you look at sow liquidations in the industry, those have popped up solidly.

If there's anything going on, I think there's further contraction going on as well as the cost of corn outside of the United States. I don't see any expansion on the horizon at all which bodes very good for this business given that I think you'll see reductions on the beef side.

The chicken industry seems to have made some adjustments. And from that standpoint I think that the fundamental dynamics on that side of the business are pretty darn solid, except for the fact that we probably will see some pretty high priced grain; and that's going to certainly increase everybody's raising costs; however I'll talk to my outlook, that the futures markets is compensating for some of that.

So before I give my outlook, Bo, why don't I turn it over to you and give them a little more color?

Great, Larry. Good morning, ladies and gentlemen. I'm pleased to report the fifth consecutive quarter of year over year record profits. Net income was $82 million compared to $76 million in the same quarter a year ago. All Domestic business segments contributed strong operating profits more than offsetting declines in our International business.

The Pork group continues its streak of record performance particularly in our core brands, while the Hog Production and Operating group had profits with solid increases. EPS for the quarter is $0.49. There are noteworthy items impacting this period's earnings in EPS which include, pretax, $39 million in charges for litigation, a $6 million Campofrio transaction expense, $4 million Hog Production asset impairment, and $4 million after-tax for a change in projected tax rate.

Excluding these charges, adjusted earnings are $0.69 per diluted share on a non-GAAP basis. We continue to strengthen our balance sheet and management for improved shareholder value. During the first quarter we retired the remaining $78 million balance of our 2011 bonds. During Q1 we also repurchased $34 million of Smithfield stock.

We replaced an expensive, short-term ABL loan with 2 significantly-more efficient and cheaper short-term facilities that increased our borrowing capacity $200 million to a total of $1.2 billion. In addition, we reduced long-term, unfunded liabilities by making an extraordinary $100 million contribution to our qualified pension plan.

Now for a few details. Consolidated sales for the quarter were $3.1 billion, up 7% from the same quarter a year ago. All segment sales were up year over year benefiting from higher meat and livestock values per pound. An 8% increase in Package Meat pricing overcame a 1% decline in Package Meat volume. While the lower volume is disappointing, this decline represents our rotation to a more profitable sales mix as evidenced by a 3% growth in volume in our core brands.

We are proud our core brand volume growth helped drive margins to record first-quarter levels at $0.17 per pound. We were able to price-through a 5% increase in cost of goods sold with a 7% increase in Packaged Meat sale values.

International sales were well up compared to last year. While average unit sales values increased, the sales improvement is in large part due to currency translations. Volume was down slightly reflecting soft demand in western and central Europe.

Gross margin for the Company rose to a record first quarter of 13.2%, up 12.7% from a year ago. These results were lead by a record first quarter performance by the Pork group and significant improvement in Hog Production results.

Fresh Pork operating profit reverted back towards the norm from record profit levels a few quarters ago. Operating profit declined to $6 per head but still at the high end of the normalized range. Packaged Meat operating profits reached record levels in the first quarter, reflecting a more profitable sales mix and a 3% growth in our core brands. Packaged Meats operating profits margins were $0.17 per pound, up from $0.11 a year ago despite higher raw material costs.

Given the economic headwind's facing the US consumers today, Management believes it's prudent to modify our projection of 3% expected Packaged Meats growth rate. Hog Production operating profits include $39 million pretax charge related to our Missouri Farm nuisance litigation. On a GAAP basis, Hog Production operating profit was $70 million, up 9% year over year. If the results are adjusted for the litigation charge, operating profit would approximate $110 million and equate to about $30 per head, up almost 70% year over year.

Our raising costs were $63 per 100 weight for the quarter compared to $54 a year ago. Our raising costs are projected to increase in the coming quarters as higher grain costs creep into a small but unhedged portion of our feed requirements. We believe our grain procurement and risk management positions will allow us to maintain a raising cost in the mid to high $60s for the balance of the year. This is slightly higher than the mid-$60 raising cost we projected previously.

The recent decline of the past weeks in the cash hog and futures markets indicate that Q2 Hog Production profits will likely decline but hold at the bottom end of the normalized $10 to $15 per head range. Hog Production could show losses in Q3 and Q4, but in total, we believe results for the full year will show modest profits but below the normalized range.

International segment operating profits declined year over year. Meat processing margins were squeezed by increased raw material cost and soft demand in western and central Europe. Hog Production margins also suffered as high grain prices rolled through our feeding operations across the globe. These factors caused International segment operating profit to fall to break even levels compared to $25 million operating profit in Q1 of last year. This condition could persist in the coming quarters if poor US grain harvest keep world grain prices high and European economies continue to flounder, squeezing demand.

Changes in the Other segment operating profit due to our exit of the Turkey business in the second quarter last year. The increase in the Corporate segment operating profit charged to $33 million is principally accounted by a $6 million charge associated with the terminated Campofrio transaction. All principal remaining elements of our equity method investments continue to demonstrate positive results but slipped from $11 million last year to Q1 to $5 million in the recent quarter. Higher raw material costs and soft demand eroded Campofrio performance. The sale of the Butterball eliminated their contribution on a year over year basis as well.

The current quarter effective tax rate was 34%. This is slightly higher than our earlier annual projection of 32% to 33%. The rate increase is principally due to a change in earnings mix with a higher percentage of our earnings from domestic sources with higher tax rates compared to international income with lower rates.

Given the mix of earnings, we are raising our outlook for full year effective tax rate to be between 32% to 34%. Depreciation for the quarter was $60 million. We've continued to project full year depreciation of $251 million. First quarter interest expense was $48 million, down $21 million or 30% compared to a year ago. Interest expense will trend slightly lower in the coming quarters, reflecting the maturity of the final portion of our 2011 bonds as well as rate reductions related to our new short-term credit facilities.

This is the final element of our internal goal to reduce the rate of annual interest expense by $100 million. This milestone has been accomplished. The balance sheet story principally reflects 4 related items. Decrease in cash, decrease in long-term debt, reduction in accrued pension liabilities and the purchase of Smithfield shares.

Cash declined $225 million since the beginning of the first quarter. This cash was used for, among other things, retirement of long-term debt and extraordinary pension contribution and the purchase of Smithfield stock. The accrued liabilities also include the $39 million charge to the litigation reserve. Strong profits, cash flow and disciplined capital management over the past several quarters has created the strongest balance sheet and credit metrics in Smithfield memory.

The increased liquidity provided by our new credit facilities, as well as cash on hand of $150 million at quarter end, provided a total liquidity of $1.2 billion with no short-term borrowings. Net debt-to-total capitalization decreased to 35%. Debt to EBITDA improved to 1.7 times. EBITDA to interest coverage was 5.5 times.

These credit metric improvements and improved industry fundamentals prompted Moody's, Standard & Poor's, and Fitch to improve the ratings for both Company debt and individual bonds during fiscal 2011. We are pleased that Moody's again upgraded our rating in August to effectively what is a double-B rating.

With the prospect of continued strong earnings and cash flow this year, as well as expanded liquidity from the new revolver created the shareholder value with our cash reserve as the highest priority. With the cash need of an immediate M&A prospect no longer on the future, we deployed excess cash and several strategic initiatives to create shareholder value during the first quarter and carried over into the second quarter.

With the new Board authorization during Q1, Smithfield purchased 1.5 million shares at a cost of $34 million. Subsequent to quarter-end, we purchased another 1.6 million shares for $31 million. Shares purchased since the beginning of the fiscal year totaled 3.1 million shares. This leaves approximately $85 million in unused repurchase authorization. We will likely continue to buy additional shares when, in Management's opinion, share prices are undervalued. We earmarked $78 million for final retirement of our August 2011 bonds. In addition, since the end of Q1, we repurchased $13 million of our bonds, continuing to deleverage the balance sheet and reducing future interest expense.

Our current domestic debt reduction since the beginning of the year totals $91 million, while we added $24 million in Polish debt for some credit facilities. We made an extraordinary pension contribution during the first quarter of $100 million. While before the contribution, we had a very comfortable statutory funding percentage of 87% of future liabilities, this extraordinary contribution created shareholder value in several ways. Ultimately we owe the money. It's just a matter of when we pay it, but importantly this maneuver helped reduce fiscal 2012 pension expense $25 million below last year. It also reduces our long-term liabilities very efficiently with pretax dollars, improving credit metrics with the rating agencies.

During our last conference call we projected full year 2012 capital expenditures to total $245 million. Over the past 3 years, conservative capital management cost, capital expenditures, accumulatively fall almost $200 million below depreciation. We've indicated on many occasions that this was not sustainable.

Several quarters of strong cash generation and a solid forward outlook give Management the confidence to now accelerate CapEx to $300 million this fiscal year, to build new Package Meat's capacity for growth, and to play catch-up on postponed maintenance CapEx.

In conclusion, we are continuing to be excited about record results of our first quarter and the trajectory into Q2 and beyond. The Pork group continues to focus on its record pace, Packaged Meat remains focused on investment in our core brand. Fresh Pork should achieve strong performance buoyed by robust exports. Hog Production group should be profitable for the full year with strong results in the first half and lower in the second.

International operations continue to face high seed and gradient and raw material cost in a recessionary environment in Europe. We are spending money to expand our Packaged Meats capacity. Our balance sheet, liquidity and debt capacity have transformed our financial condition from a liability to a competitive weapon.

We have never been better positioned to grow shareholder value across the entire integrated platform and capture value around the globe. Thank you very much for your attention. Now back to Larry.

Thank you, Bo. I think Bo put an awful lot of color around some of my comments. And as I even sit there and listened to his comments, sometimes I just marvel at some of the numbers and how good they are. For many of you who have known me, I've been here well over 30 years with this Company and I've never seen the Company in as strong a position from a balance sheet standpoint.

As you know I have a financial background, so I can relate to the financials as much as anyone. But when you take the combination of a very strong balance sheet, combine that with what I think our organization has done over the last several years in positioning itself in the marketplace, we are in a very, very strong position, and I am extremely optimistic. I never thought I'd be pleased to say that we are looking at $60 hogs, and $60 to $65 hogs, and I was going to be pleased. Every time we've ever been there before, that was sort of a disaster on the Meat Processing side of the business. And anyone in the business knows $60 hogs usually means losses in the Fresh Meat business and little to no profit in the Packaged Meats business; and here we are reporting extraordinarily good Packaged Meats margins and very good Fresh Meat numbers; and of course our Hog Production business obviously benefits from that.

Looking forward, we're going into the good time of the year for the Fresh Pork business. That should seasonally get better; it generally does in the fall. As well, the export business looks to be getting better as the data is coming out from Government reports, exports are increasing. We've got very solid, very solid exports going forward.

You're aware of the tariff relief in Korea, which again should help the export side of the business. I think many of you know, we've got some very strong Asian business outside of Korea, which looks to be very good as we go forward. So the Fresh Meat is going to be great. We're coming into our Packaged Meats time of the year when the Holiday Ham season hits up. That's always a good time of the year for the Company.

Comparatively as you look at last year's second and third quarter, we've got some pretty big mountains to climb, but we've got the Management team in place who is fully prepared to deal with that. In fact, I don't think I've seen the team this motivated and pumped up in a very long time. So I think the Pork group is well on its way to having -- I'm not predicting its fifth straight year of Pork group record profits, but they got a darn good start and things look very good for the next quarter or 2 quarters.

So we will have to see, but I think you should expect me on the next call and the following call to be reporting some good numbers on the Pork segment side of the business. Internationally, as Bo said, we'll struggle. And on the Hog Production side, we will deal with it as it comes. We've got very strong hedges in place. I think it's going to have a bigger impact on the rest of the industry. Whatever happens with corn is going to impact the industry more than it is us, so we are well protected. And as Bo says, we're probably going to be a bit profitable this quarter. We could lose money, but for the year, I think our Hog Production business will be profitable.

And I can't believe I said that, following the couple years ago when corn hit $6.50; and the industry went tumbling out of control. Here we are talking about corn well over $7 a bushel; and we're not concerned that we're going to lose money for the year. That's the change in the dynamics. That's the result of supply and demand getting back in balance.

If you can't tell from my attitude, I am in a great mood. It's a great time to be running this Company. I'm extremely pleased with the Management team we got in place. We've got guys and ladies who know what they're doing. We understand what to do. We've got a strategy in place to further improve our brands. You will hear me again and again focus on that. That is where we're going in the Packaged Meats business to deliver to you more consistent earnings.

Tim Schellpeper and Mike Brown who run the 2, big slaughter operations are doing a darn good job on both sides of that on the Fresh Meats side of the business. It's showing up consistently on the Fresh Meats side of the business. It's fun to be the boss and get the credit. I don't deserve all of the credit.

These guys that run this business deserve the credit, but it is a nice time to be in the business. Keira, and at this point we would love to take questions.

Thanks, 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.

Thank you. (Operator Instructions) First we'll go to the line of Ken Zaslow from BMO Capital markets. Please go ahead.

Good morning, everyone. My first question is, can talk about your ability as well as how much Smithfield has been actually able to sell forward hogs and talk about that a little bit. I know you're talking about the hedging side of the corn, but I'm just curious on what you're doing on the hog side.

Ken, let me repeat what I think I did last quarter. We have been more concerned about the grain markets than we have the hog markets and we thought there was more opportunity for risk on the grain side than the hogs. And so what our position has been, and strategy has been, to put bigger hedges in place to protect us on the corn side and we've been neutral on the hog side.

We do have some hedges in place on the hogs. And I'm going to tell you, they are favorable hedges. We've got profits, but it's not a lot. It's not a lot, and we don't have a strong position going forward in live hogs. We have a strong position on the grain side. I hope that helps you a little bit.

Very much so. And on the Packaged Meat side, the seasonality obviously comes into play, but generally do you think that you've reached the level in which you have now sustainable margins? Is there a level where you can move up? Is there a level moving down?

How do you think about it? And again, absent the seasonality of it, on the Packaged Meat side, how do you think about the margin structure going forward?

Let me respond to your second question. We continue to maintain that our Packaged Meat results will be in a normalized range between $0.10 to $0.15 per pound. We were benefited this quarter. We exceeded that at $0.17, but I think as we look out in the future, we're comfortable with that $0.10 to $0.15 range.

However I do think, Ken, that we are looking at the -- I'm surprised to say, we're looking at the higher end of that. We're staying north of my $0.10 by a ways. $0.17 is a strong, strong quarter here, so I don't want to set anybody's mind that we're moving the normalized range north of $0.15 towards $0.20, but we're not communicating that to you, but we are seeing some good margins here.

Great. I appreciate it.

Next we go to the line of Christine McCracken from Cleveland Research. Please go ahead.

Good morning.

Good morning, Christine.

Larry, I was a little surprised that fresh meat sales and profitability weren't a little stronger; and you talked about some of the factors impacting the quarter. Not to say it wasn't a good quarter. Just some of the trends late in the quarter I think were a little better. I'm wondering, is it just a function of timing? You talked about that the seasonality of it and the expected strength of exports here as we move to the back half of the calendar year, but can you talk about, is it the domestic market? Did you have an impact from the extreme heat and maybe a weaker grilling season or is there some kind of storm impact in there?

Maybe you can just talk a little bit about where we were in the quarter relative to maybe some of the calculated margins in Fresh Meat.

Christine, let me, gosh, wow, that was a lot of questions there.

I had to fit it all in one. (laughter)

You did a very good job of use of the comma. Christine, I guess I would say that the Fresh Pork business has gotten much better, even since the end of the quarter, so I don't know whether you're getting the timing wrong. I was satisfied with where we were, and you know we track our sales relative to how the rest of the competition is doing on the Fresh Pork side.

I will tell you, I'm always amazed by some of the competition and some of the numbers, the way they calculate their fresh pork results, but our numbers are looking, on a comparative basis, in terms of trending, we're fine. I don't know anything about any grilling season.

In terms of exports, our exports have gotten better; and they will continue to be better. I expect that we're going to report even a significant -- we were up 13% for the quarter; that's trending up. So you're going to see more than that unless something -- well, we really got a lot of that booked at this point, so you're going to see a good second quarter as well on the exports. And I think our Fresh Pork is going to be even better, so I was very pleased with our Fresh Pork. Bo, do you have any comment?

No, Larry. I think the fact that we are seeing greater disappearance I think from the US of our pork as well as our competitors' pork. So I think the balance looks very good for fresh pork as we look at the coming quarters.

I'll tell you one thing, Christine, that impacts us, on the East Coast, we're going through this cost improvement initiative with Murphy-Brown. Part of that is realigning these farms, so we're having farms that are down.

And in the Smithfield Packing Company, Tim Schellpeper's group is being shorted hogs. They have been short hogs most of this summer, so they've had the overhead absorption associated with that, which we sort of back that out. Thinking about that, once this cost initiative is finished, the flows will come back up. So Tim will benefit very nicely from that, but that's negatively impacted our East Coast operations.

And of course we all saw some wheat fall off with the heat, but that's hurting us a little bit, and maybe that's impacting -- I mean, I sort of adjusted for it and didn't think about the -- to talk the question through, because we just make the adjustment for it. But I think we are having an impact of that. We'll still have that for another full year until this cost initiative gets finished and these farms get realigned and restocked, we'll going to continue to have this. Tim's going to have this problem affecting him on the East Coast.

Thanks.

Next we go to the line of Ryan Oksenhendler from Bank of America. Please go ahead.

Good morning, guys.

Good morning.

I just had a question in terms of Packaged Meats, in terms of how you get to your 3% target volume growth for the year. I guess it seems like -- I think foodservice is about 25% of your business; and so I think that, if you look at your volumes for the quarter, that was probably down in the 6% to 8% range.

So in terms of getting to your target for a year, is it a function of that moderating and a little bit of growth in the retail sector or is it huge growth in market share gains in the retail and kind of foodservice staying down in that range?

Ryan, I would tell you that your number on foodservice is right in the ballpark; and you're right on both numbers, so you know the business well. It's obvious from that. I compliment you for that.

We are coming into season. The other thing is we started these marketing campaigns and we know that they're going to take time to hit the ground. We're seeing benefits from our marketing programs sooner than we thought we would be seeing some of those.

The other side that we're seeing that I know it's going to surprise you with this statement, we're seeing our brand's expansion outside the United States. We've got some good branded business outside the United States, particularly Canada; and that's growing very solidly; and so we're making a real mark north of the border here. And so I think that we've got momentum coming behind these brands that we have focused just this calendar year on increasing the support for these brands; and we're getting hit sooner than I thought we would get them. You don't usually get this kind of movement or retail this quick. We are already seeing movement this quick.

And so, our marketing guys, I'll tell you the other side, the operating companies have hired a couple of new, high-powered, marketing guys. One for Farmland and another for Smithfield Packing Company, which these guys come with enormous experience and talent, so we are beefing up that end of the business. These guys have got some good ideas, some new ways for us to market. They've resharpened our focus in terms of how we go to market. They are bringing immediate benefit and showing us ways to market our brands better and so we see things coming forward.

I think we've got some products coming out that we are excited, very excited, about that. We've got a new bacon product just around the corner that you'll see that I think is going to be a home run for us, so I am excited. We have had to modify, Bo made the comment, from 3 to 5, back to 3. The reality of the foodservice business is what it is.

And this slowdown in the overall economy, as we moved into the summer, I think has taken the whole country by surprise; and so we're seeing a little bit there, but we're still optimistic, in spite of the fact these categories -- bacon category, uncooked bacon, was down some 7% or 8% the last IRI report I saw. Our bacon is moving nicely, so in particular, our branded bacon is up very nicely.

So those are the things that I think are going to make this number, so I feel comfortable we're still going to deliver against it.

Okay, and then it's just a quick follow-up then. The profit numbers are actually -- $0.17 is unbelievable. I think you were targeting $18 million in marketing. Would you consider raising that?

I don't think we're going to raise that this year, no. I think our marketing plans are in place this year. I don't think that, no, I don't think we will increase it above that, no.

Okay. Thanks, guys.

Next we go to the line of Christina McGlone with Deutsche Bank. Please go ahead.

Thanks, good morning.

Good morning.

Bo, I just wanted to go back to what you were saying on Hog Production, because I missed a little bit of it. So you were saying that Q2 would be down sequentially but you'd still be within the normalized 10 to 15 although at the bottom, and then you were saying Q3 and Q4 could lose money because of the drop in hogs? Is that correct?

That's correct, but overall, we're still projecting that the results of the first half of the year are going to far outweigh any negative we see in the back half.

Okay, and so Larry, you're saying -- are you starting to see signs of contraction because of the fallen hog prices and the fact that corn has been so high or is it just you're not seeing expansion?

No, I think we're seeing contraction. I think in terms of published data that you can see, you can see the sow slaughter. Sow slaughter has turned dramatically here, and then this $8 corn I think has scared people pretty substantially.

Anecdotally we know that there are people who were saying -- there's smaller producers who are just saying I'm not going to do this anymore. Bo?

If you look at the slaughter data that Larry was talking about for sows, probably for the first quarter or two quarters of this calendar year, we were actually tracking with slightly lower slaughter compared to a year ago. Last 13 weeks has gone from 2% below a year ago to 5% slaughter rate above a year ago, which I think in most people's calculation would represent a liquidation mode. Not hard, but it's still there and you have one or two competitors.

Cargill will probably expand some sows, but I think that's going to be overshadowed by the other reductions we see in the smaller producers.

Well, I'm sure if I were a producer sitting there today and I've seen what's happened to this hog market of recent, and I see what the USDA predictions are on the grain crop for the year, which continued to deteriorate, I mean, I would be shaking a little bit if they haven't taken any protection. And many of those producers don't take any type of protection at all; and you add that to where I think the banking environment is out there for farmers in terms of additional extensions of credit, I don't think the situation is very good.

So I think all that's positive for the business, because I think beef's going to be down too, so I think there's going to be, we've got a shortage of protein today; and I think we're going have a bigger shortage of protein tomorrow, so not just in the United States.

That's why I think you got cheap US dollars out there and you got some of these places still continuing to grow particularly Asia. The demand for US pork is going to be, continue to be, very robust; and it's not just pork. And so I think that's going to create an environment that should be very good for this business.

Generally once you've been in the -- once the cycle has been this long, it starts to trend down pretty dramatically and you start to see the other side. Bo and I look at each other and things look very good from where we sit. Agree with that, Bo?

Yes, I do.

Thank you. That's really helpful. And as a follow-up, Bo, what's the adjustment with the tax rate, the $0.02? Is that because you're going back to where you guided us or what exactly is that?

Yes, I apologize if I wasn't perfectly clear. I think earlier we were giving guidance in the 32% to 33% range. That has taken an uptick with the change in mix of our greater proportion of our earnings coming from domestic sources at higher rates and it may tick up 1% compared to where we were before, so we put another percentage point in our outlook.

So write your Congressman and tell him when US profits are up, our tax rates go up, which means rates are lower outside the United States. So maybe we can get a revision of the corporate income tax rate and all our investors could benefit. How about that?

And the personal income tax rate. Thanks. (laughter & multiple speakers)

Next we go to the line of Heather Jones with BB&T Capital Markets.

Good morning. On the Fresh Pork side, margins improved considerably for the industry late in your quarter. Going forward, should we expect your profits to improve or the impact from this Murphy-Brown realignment, is that going to significantly impact profitability for the whole year?

Heather, I think that our Fresh Pork numbers should get better, because we've got the same negative impact in the first quarter, so the second quarter should sequentially and seasonally get better, so I think you should expect better Fresh Pork numbers.

Are you still sticking -- I think on your Q4 call, you had targeted within the normalized range for the year of 3 to 7. Is that still a fair number or should we expect above that range given how strong exports have been?

Obviously we haven't completed the second quarter so we're somewhat crystal-balling, but I think what our direction would be, that we're going to be at the high end of that normalized range and may even exceed that depending upon what happens in the final weeks of the quarter.

I think that's right, Heather. I think where we're showing in the first quarter, we could be over that $7 range. In fact I expect we will be, but what Bo is talking about on an annualized basis, this is the good time of the year. We're coming into the fresh meat period now, so we could have the inverse going into the fourth quarter. So I think -- (multiple speakers)

Okay.

Second and third quarter.

Okay, so above normalized range for Q2 and possibly Q3, the full year, we're looking more at the high end?

I think that's right. Wouldn't you say, Bo?

That's correct.

Okay, thank you.

Next we go to the line of Tim Ramey from DA Davidson. Please go ahead.

Good morning. A couple of mixed questions here. As you've talked about the increase in exports, I think exports were 16% of volume, 13% of revenues last year. Do you have a sense of what that might go to this year and; then also, it's a second question but it's sort of the same mix thing. The percentage of internal hog -- or hogs sold externally, will that decline in 2012?

We calculate our export sales a bit differently than the math you're doing. We do it as a percentage of the fresh pork, because that's the available product; and I think I saw for the quarter, we're looking at like 26% of our fresh pork volume went on the export market. So it's gotten to be a very sizeable number, but the industry has moved up.

So we're looking at, I mean you ought to be thinking of exports now in the 25% of our, at least, our fresh pork volume. That's the kind of number this industry has moved to and I don't see anything moving that down. If anything, I think that number will move up, so I'm not predicting a number here, but I could see it getting to 30% on some quarters here.

In terms of the external hogs, Bo, do you have anything?

Yes, I think part of the hog cost improvement program Larry mentioned in our HBG Group, a lot of that has to do with making sure we get the right hogs, at the right plant, at the right time; and a lot of that is increasing our focus on selection rates, which should improve the percentage of pigs going to our plants from our hog operations, because they're going to be in more tighter weight range and fit the specifications our plants need.

So Bo, if you thought about that, is there some number that's just structural that says there's always going to be 10% to 15% of the hogs sold externally no matter how good you are or how well the plants are sighted or could that number go much lower?

Well Tim, you've got to remember we have that big group of hogs out in Utah. They're producing over a million pigs a year and very few if any of those come back to our plant. Most of those are headed for the West Coast.

Okay.

And those are structural. (multiple speakers)

Long term contract on those.

Thanks so much.

Next we have a question from the line of Lindsay Drucker Mann from Goldman Sachs.

Thanks, good morning, everyone.

Good morning.

I wanted to get a little more clarification on your raising costs and hedges. So if you were to sort of mark-to-market for where spot prices are today or even if we were to think about $7.50 corn and $14 beans, what raising cost number would that mean for you guys?

Well, I'm not sure I necessarily want to project a hypothetical but certainly $7 corn is going to require something north of $70 in terms of breakeven.

I wouldn't be surprised if it's $72 or something like that.

Could be higher than that.

Okay.

And that's one of the issues that the industry and the hog farmer who does not have his grain hedged, that's the kind of raising costs they're looking at. As we've said before, we've taken some very strong positions, so I don't think we're going to be there. In fact Bo has indicated in his comments where we're going to be.

Okay.

We're certainly going to be in the 60s. We're going to be in the upper 60s, so we've still got to buy corn at -- sort of in the $6 -- well, over $6, but know where near $7, and certainly nothing north of $8. So we've got an advantage to the industry and that's the benefit of our hedging programs.

So as you think about buying corn forward for, once your hedges roll off -- I mean, are you laying on fresh hedges here at new levels or are you taking for longer dated purchases or are you taking a view that -- I know at your investor conference, you guys talked about normalized corn prices closer to a $5 level.

Are you taking a view that we get some pullback in terms of corn prices going forward?

At this point, we don't comment on our future derivative positions, and we're not going to comment on what our tactics are here today. I apologize.

Okay, so then just maybe just additionally on the cost side. With the Murphy-Brown cost savings program of $90 million, where does that put you on the cost curve relative to the range of producers?

I guess there are a couple of benchmarks out there. One that I think the analyst community uses fairly well is the ISU cost model. And I think before we were probably a penny above that; and maybe our East Coast operations might have been a couple of cents, but I think the cost savings initiative will create an environment where our Midwestern operations will be producing pigs below the ISU average and will probably be equivalent to the ISU average on the East Coast once everything is all said and done.

Thanks, guys.

Next we have a question from the line of Akshay Jagdale from KeyBanc Capital Markets.

Thank you. Congratulations on a good quarter.

Thank you.

Just wanted to follow up on the packaged meats volume question that was asked earlier. I'm not sure if I understand you correctly, Larry. So am I correct in saying that this quarter, volumes disappointed; and from what I can understand, it's mainly because of the foodservice industry volumes being weak. So if I'm wrong there, please correct me. But what I still don't understand going forward is you're projecting an improvement in volume trends, significant improvement in volume trends; and I'm not sure where that's going to come from. Like are you investing more money? Are you going to reduce your prices and gain market share? I'm not clear on that. Could you help me with that?

I will. Certainly, you're never disappointed when your overall volume declines, and it's down 1% so that's not a huge decline. That's a small decline. And yes, I am certainly bothered by the foodservice, but I can't make people eat food that they don't buy, so where we do feel very good is on the retail side of our business, which is 75% of our business is on the retail sector.

And what we are seeing is strong growth in our branded business, in our key brands; and so I think that's what's going to drive that 3%. And in fact that's up 3% for this quarter, even in this quarter, that's up. As most categories were down, our Retail business is doing well, so we're optimistic about where we think our marketing programs will put that.

And I'm well aware, we just reported a down quarter yet we're still projecting up for the year which means we've got to get on with it in terms of bringing the average up to 3%, but we're optimistic that the programs we've put in place that these guys have done is going to benefit us; and so I guess you should ask the question, do I think the foodservice business is going to return? We're not looking for just the foodservice business to bring this volume back. We're expecting our Retail business to grow even further.

Because even at the restaurant, they still eat, so they go to the grocery store for foodservice which means we still get the sale. We just get it at the retail counter as opposed to getting it at the fast food or fast category. So we think it's going to be -- (multiple speakers)

And just a follow-up on the retail environment. Can you just remind us how much of your retail Packaged Meats business is private label. And beyond that, what are you seeing in terms of trends and trading down, et cetera? Because clearly, your business seems to be outperforming and the results in Packaged Meats profitability-wise were really outstanding. So I'm just trying to understand whether that's purely Smithfield specific or there's some tradedown that you may be benefiting from.

I think our key brands are about 65% of our Retail business, and then we've got our private label business. Our key brand brings us to about 65%. Then we've got our remaining brands that take us up about another 10% to about 75%, so our private label businesses are about 25%, I think. Does that help you?

And what are you seeing in terms of -- are you seeing any trade down from consumers?

In terms of -- I don't know what you mean. You mean trade down from the premium brands to our brands? (multiple speakers)

Yes, like is your private business, private brands business, growing exceptionally faster, significantly faster, than branded or have you seen any trends in that mix per se that make you believe that perhaps consumers are trading down in this environment when meat prices are going up to private label brands.

Akshay, the response to your extra questions are that our private label business is down, and that is part of the mix change that we're consciously trying to implement of putting greater emphasis on our core brands less on our non-core brands and less on our private label. So there may be a trading down to private label amongst other competitors, but our volumes are down in private label and non-core and up 3% in our core brand business where we're putting our marketing dollars.

And that is not to say that we're walking away from private label business. We are open and available; and for our customers who have a branding programs surrounding that, we will do private label. We want to be the full pork supplier to our customers. Private label is not a focus of our business. We believe our brands have lots of strength, latent power there that we think we can extract. I think we have demonstrated that again and again and again. And our customers, our customers, are seeing the benefit of this, because they're selling it.

So it's not that we're walking away from private label; however we have rationalized out some capacity, so we're not chasing private label business to fill our plants up. We've got good business; and in fact Bo made reference to the fact that we've approved capital expenditures at this point to increase, increase, our Packaged Meats business, because we've got some very good opportunities out there on the higher end, particularly things like dry sausage where there's opportunity there. Those are very nice margin businesses that we're putting money in.

So I think it's a shift in the business and we've been talking about it for 4 years now and this is our 5th year and our results are there to demonstrate that our strategy seems to be working fine. And in this tough time, even in this tough time, even I'm a bit surprised how strong our brands are performing in a very tough environment; and I know what the competition would say and I know what the categories say, because I've seen the IRI data just like you do.

But it's not that people trading in any particular way except they're trading towards our brand because of the value priced brands and we can compete with the private label. We can compete with them.

Okay, thank you and congratulations again.

Thank you.

And next we go to the line of Farha Aslam from Stephens. Please go ahead.

Hi, good morning.

Farha, how are you?

Good. First a housekeeping question. Just your interest expense for the year, what do you expect that to be?

We're looking at right about $125 million -- I'm sorry. I want to get this right. $245 million. I apologize.

$245 million was last year, right? But this year you'd expect it to be lower?

I'm sorry.

Maybe I can ask my real question and we can circle back on this one.

Very good.

Okay, Larry, you'd mentioned that you're seeing an increase in sow slaughter rates. Kind of when do you expect that to show up in the hog price and is the reason why you've been more conservative on your hog position is that you expect hog prices to possibly go up in the second half of the year?

Farha, you hit the second question dead on the head, is that we thought there was an equal opportunity for hog prices to go up as there were for them to go down so you don't necessarily hedge if you think you got an equal weight opportunity.

We try to do a risk analysis of what's the upside potential versus downside risk and such. And we've seen in the live hog market, it seems to sort of indicate where the fundamentals are. I think there's a lot of potential for the hog market to go back up. I think as this beef production drops off, poultry production drops off, I think there is liquidation going on, modest liquidation going on. I think it is going to be 6 more months before that's going to show up in any kind of measurable way, so it's out there in sort of next February and March and April; it's not anything this quarter, I don't think.

In fact I think hog prices might very well trend down, as they seasonally do trend down solidly. I'm thinking it's into the spring of next year is when you'll start to see the impact. In fact you're seeing some of it. You've got pretty high futures next summer and I think there may be some significant opportunity if those futures didn't go higher than that, so I think there's some upside potential to this live hog market.

So your commentary about losses in the second half could prove to be conservative in your Hog Production group if you get that rally?

Yes, Farha, making the prediction about the hog market next February and March, and you're sitting in the first week of September, that is a very difficult thing to do, but I think there's the potential, yes. I think there's the potential for rally here, particularly, Farha, if these exports stay strong; and they look strong. There's going to be a lot of demand for these hogs so it could be there. It could happen quickly. Bo, do you have an answer?

Yes, I apologize. I got caught up in my notes here. Last year, we had $245 million interest expense as you correctly pointed out, Farha. This year for a full year we're expecting 185 -- or a $60 million decrease. On a quarterly basis, we did hit $48 million and I think if we went back about 5 quarters, you'd see us -- so right around $70 million in interest expense. So we anticipate as we move forward through the balance of this year that we could trend closer to that $45 million or $46 million quarterly interest expense.

Okay, thank you very much.

At this time we're going to have conclude the Q&A portion and turn it back over to Larry for some closing remarks, please.

Thank you, Keira. Ladies and gentlemen, thank you for joining this morning. It is truly a pleasure to deliver these kinds of results to the market. I know some of these are surprising and bucking the trend of others in the industry. We've been working on this for a long time and I would tell you that a number of people in our organization, my Management team, is pumped up.

We think there's a lot of potential left in these brands and we're just now getting to it in a serious way, in spite of the fact we've got 4 record years in terms of the Pork group. I wouldn't be at all surprised if we have a 5th record year in the Pork group and it will be driven by the Packaged Meats business, and strong exports in the Fresh Meat side of the business.

We'll manage the Hog Production side and we'll have to wait for the world to turn on the international side, but in the near term I am very bullish and optimistic in terms of where we position this Company and the cost structure improvements in place and the marketing plans that are just beginning to hit, we're not going to go stupid on the marketing but we're going to commit more to it.

We've got a better plan. We've got better people doing it and I look to be reporting to you again and again on the success of these programs. It's a great day to be at Smithfield. It makes me feel so good from a couple years back. Bo and the finance group have done a terrific job on the balance sheet. We are poised to go and I think the future looks very bright both for the year and even beyond that. So thank you very much for listening this morning.

Thank you, Operator. Can you give the replay information, please?

Thank you. Ladies and gentlemen, this conference is available for digitized replay after 11 a.m. Eastern Time today through September 22 at midnight. You may access the digitized replay service at any time by calling 1-800-475-6701 and enter the access code of 213186.

International participants may dial 320-365-3844. Again, those numbers are 1-800-475-6701 and 320-365-3844 with the access code of 213186, and it is available after 11 a.m. Eastern Time today through September 22 at midnight. That does conclude your conference for today.