Smithfield Foods Inc (SFD) 2012 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Smithfield Foods fiscal 2012 third-quarter earnings conference call. At this time, all participants are in a listen-only mode, and later we will conduct a question-and-answer session. Instructions will be given at that time. (Operator Instructions) As a reminder, today's call is being recorded. I would now like to turn the conference over to Ms. Keira Lombardo. Please go ahead.

Good morning. Welcome to the conference call to discuss Smithfield Foods fiscal 2012 third-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 CEO, 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?

Good morning. Thank you, Keira, and good morning to everyone. I'm extremely pleased to report the results of our third quarter. We're reporting $79 million versus $202.6 million last year for the quarter. That's $0.49 a share compared with $1.21. On the surface, that looks like quite a difference between the two years. I hope you had an opportunity to look through the press release, and Bo will speak to it more fully, but there's some significant items in terms of gains over the last year with an insurance settlement, as well as a charge this year coming through our equity accounting with Campofrio that accounts for over $0.60 a share in just those two items, and there are numerous others.

So as you look at the business more fully, and understand the numbers more fully, I am extremely pleased with this third-quarter results and as I think about it who wouldn't be? I see very strong fresh pork results. When I look at 6% return on sales and $11 a head and $0.15 a pound on our packaged meats, in spite of the fact that all the proteins are up significantly on a raw material basis, that makes me feel very, very good. Beyond that, our hog production business, which is showing a very small loss for the quarter, is really relatively insignificant. Seasonally, that's always the case in the third quarter, so once again that's solid. Our exports are (inaudible) blowing off the page, and its been an extremely good period for that, and I don't think that's come anywhere near to an end.

And even beyond that, our interest costs are down, which means the balance sheet is in terrific shape. Our pension costs are down. We had a great holiday ham season which is traditionally an important part of the year for the Company's profitability as that's sort of our nameplate's stake, and we were able to grow both volume and margins in those categories that are extremely important to me. So as I look at the quarter and think about where we are from a business standpoint, I would tell the listeners this morning that I am sleeping very well. As I had said a couple years ago, I wasn't sleeping through the night. I assure you I am sleeping very well these days. The business is performing very, very well.

On the fresh meats side, those margins were driven by profitability in just the first two months. Following the end of the calendar year, our results in fresh pork have declined somewhat. However, I don't want anyone to get the impression that our fresh pork business is bad. We've got a lot of opportunity to improve where we're at even if the numbers we have reported, but this is a business that seasonally changes after the first of the calendar year. I think all of those who follow the Company know that, and we've seen some downward trend in our fresh pork results after the first of the year.

Importantly, on the packaged meat side, that business is solid. We've got top line growth in very significant numbers. We've been very successful at passing through the raw material cost increases that the industry has been seeing. We've been successful at passing those through, which is in part the result of our focus, our capacity changes, and as well, the fact that we began to more focus our attention towards consumer marketing programs that we think are helping us in our relationships with our customers, and helping our brands to build equity that allows us to have a stronger position in the marketplace. So I'm extremely pleased with that.

I hope you saw that we've made the announcement previously and reinforced that in the press release with our marketing association with Richard Petty Motorsports. We have gone back into NASCAR. We have been this direction before. We think there's a tremendous tie-in between the demographics of the people who eat our product and the people who follow NASCAR. We are highly-focused with our marketing people, which we have significantly strengthened our marketing programs, with tying in and activating that relationship through to brand and product growth, as well as new products.

I think as we go through, it's a 16 race program. It's a multi-year agreement. I think you'll see that we will be activating our brands through that in a significant way as we go into the year, and you take that, combined with the relationship we have with Paula Deen. As well as the focus we've had on television advertising, both for the Fall season as those on the East Coast saw, as well as that with our Farmland and Armour Eckrich brands in the Midwest and Upper Midwest.

I think we are beginning to change the focus of this Company in a significant way and we're beginning to have an attachment to the consumer, in addition to our customer, and I'm extremely pleased with the way that's going. For the first time, I can tell you that we are developing a product innovation pipeline, which is a phrase not often used at Smithfield Foods, but I can tell you it is now being used in the halls on a regular basis. We're focusing on new products coming into the marketplace. Some of you have already seen our pouch bacon product that's hit the retail stores, and that's been very, very successful.

We've got a number of other products that are coming to market very soon, that I think that we'll have more to talk about as the quarters come and go. I think you'll see us talking more and more about that end of the business, and I think that's the future for this Company. It's allowing us to pass through cost. It's allowing us to be a point of difference with our customers and I think it's changing the mix of the business in a way that is sustainable and will help us maintain these margins as we face these raw material cost increases.

Clearly, an important part of all of our drivers for the profitability, in fresh pork particularly, is the export business, and I know you're all interested in our comments surrounding that. Our export business is up substantially more than the industry. You're all aware that it's tied to the Asian markets and that we've been the recipients of some special business in Asia that has certainly impacted the numbers in a big, big way. However, that's not the only country that's doing well. We've got significant increases in Japan as well as Korea, in addition to other parts of Asia, and internally, we are changing our thought process around the exports, and we're moving toward the concept of a trade channel, away from an opportunistic sale.

We are putting people now in-country in-place to build relationships through the trading business into the customer relationship business, and I can tell you that the reorganization we made a couple of years ago, putting all our international groups together, has been very effective. No question a cheap US dollar has helped that process, and the fact that there's been a shortage of pork outside the United States, which has given us a competitive advantage. We have taken advantage of that competitive advantage and the opportunity, and we're now putting people in place, we're building relationships through the trade, if you understand what I mean by that.

The free-trade agreement as you know is now in effect and starts to take effect in Korea I think on March 15. That again, Korea is already a focus of the Company. We're up substantially for the year. That will be another opportunity, as well as we're already doing business in Colombia and having conversations with people in Panama. So the export business now, we're seeing just like the foodservice business and the retail business, we're seeing that as another channel to the business, not just a hit and miss business.

The foodservice business is up. Our retail business is slightly off, 1%. Our foodservice business is up 1%, and our core brands, in the retail side, are doing fine. And in fact our value brands, which you would expect would be, with the tight dollar in the consumer's pocket, our value brands are doing better than our premium brands. Our core brands are doing well in the foodservice side of the business, as we've seen people migrate back to the restaurants and it's not just McDonald's and Subway and Wendy's. It's the regular business that was hit so hard back during the recession, people are eating out again, and whether that's going to continue, that's going to go up and down, as people see the economy, but that's a positive for the quarter.

On the hog production side of the business, we've got our cost improvement program now that is well into its -- starting into its third year through the second year. We are extremely pleased. I can tell you today that we will accomplish the goal. We will start to see ourselves come back up to full volume in hog production starting the beginning of the third quarter of this fiscal year. It has accomplished what we thought it was, which is the $2 a hundred-weight and the $5 a head, that will happen. The volumes will start to come back before the impact to the full P&L will come in, but we have paid essentially all of the cost and nearly all of the capital has been paid, so now we're getting to the benefit side.

As well, as you saw the announcement Smithfield has made relative to our pen gestation migration, we are 30% converted as we move towards 100% conversion of our Company-owned farms by 2017. For the first time in a very long time, the vertical integration program that we put in place a long time ago, that there's been so much negative discussion about our live production side of the business, we are now starting to see some real tie-ins between the meat processing business and the live production side of the business. We've got competitive points of differences that our customers understand, and we can take advantage of. We've got genetics that allow us to provide a product differentiation into the Japanese market that gives us a significant point of difference. It's got big opportunity.

It's already having its effect in Japan. We've got feeding regimens that we can put in place both to feed wheat instead of corn as well as take peeling out of the product and create a product for the Japanese market, a product for the Chinese market and access customers with feeding regimens. Now we've got pen gestation, so to the extent customers want a product differentiation like they've discussed, some have discussed with us, and we're having a number of calls now, we're in a position to meet that need. So I see the point that our hog production business is starting to tie back into our meat processing business, and give us a point of difference. And I am for the first time in a long time, I see that as an opportunity for the Company and should give us a place in the market that others will find it difficult to go with us.

Internationally, the big news is that the announcement by Campofrio that they have taken a significant charge to the P&L for the quarter. We would refer you to some of the information they have on their website, and Bo will speak about it more clearly, but we are extremely pleased. These are some of the changes in that business that we needed to see. We've been pushing for this time on the Board. We've been pushing them to do that now for some significant time. They have made the decisions to make some of the changes in their business model that needed to be done. They've made that decision. There's some implementation time associated with that, but that is good. That's good for our investment in Western Europe.

And finally, we've had our investment in Romania for a number of years. We now have an export license. To those on the call you may not understand the value of that. That allows Romania to access some of the higher-value product opportunities in Western Europe that we have not had the opportunity to do, and that's a big positive for our investment in Romania. We've been working on for a number of years, and we're the only one inside the country that has it, so that's a positive for that piece of the business. Obviously that's a smaller piece of our whole overall international business, but again it's a positive.

I'm pleased today. The balance sheet is in great shape. We have lots of liquidity. Bo will talk to that. I see the business with our retail and foodservice customers, never better. I think I can say with a lot of confidence, we don't have a single bad relationship with any customer of any significance to Smithfield, whether foodservice or retail, and that gives me comfort.

We have meetings with them. I was just in Japan about four weeks ago visiting all of our Japanese customers. Tremendous visit. I was just in Des Moines here just a couple weeks ago with Vice President Xi and other Chinese customers, as well as Chinese opportunities for people who want to talk to us. We have a great reputation there, and that country, I am feeling very good with our domestic relationships, and I'm feeling very good with our Japanese and the opportunities to grow our business internationally have never been better. So I'm sleeping well and I'll talk to you about what I see coming down the road here after Bo has an opportunity to give you his financial report. Bo?

Thank you, Larry. Good morning, ladies and gentlemen. Smithfield's third-quarter net income was $79 million, with an EPS of $0.49, compared to last year's third quarter net income of $203 million and an EPS of $1.21. While this year's third-quarter results fell short of last year's record performance, we are very pleased that when earnings are adjusted for the impact of the Campofrio non-cash charge, this was our second-best third quarter on record.

Adjusted non-GAAP Q3 EPS was $0.69 this year, versus a similarly-adjusted $0.84 last year. The strong results were delivered through consistent performance in packaged meats and our core brands in difficult market conditions, as well as record third quarter operating profits in the international segment before the Campofrio charge. Principal reason for the year-over-year quarterly earnings shortfall is a decline in fresh meat profits from record-high margins a year ago. That said, fresh pork margins remain above the normalized range.

Fiscal 2012 nine months year-to-date net earnings were $282 million, generating an EPS of $1.72 versus $423 million, with an EPS of $2.53 in the same period last year. Both current quarter and year-to-date operating profit and earnings per share include a number of noteworthy items impacting performance in both this year and last. Year-to-date and last year's items have been highlighted in our discussion of prior periods. When these were applied to both periods, the adjusted non-GAAP year-to-date operating profit was only 6% below last year's record. Non-GAAP nine-months EPS was $2.16, within 1% of last years $2.18 earnings per share.

Sales for the quarter were $3.5 billion, up 9% compared to the prior third quarter. Strong revenue growth was benefited by higher average selling prices across all segments. The 11% total pork segment sales growth was led by a 19% increase in fresh pork sales. Contributing to fresh pork sales increase was a 7% growth in volume, and an 11% higher average unit sales price. A 6% increase in packaged meat sales was driven by a 7% higher unit price, coupled with a 1% decline in packaged meats volume.

Hog production sales grew 17% in the third quarter as higher average unit market prices continue their upward trend, increasing 23% quarter-over-quarter. Volume declined 6% in the third quarter year-over-year, reflecting the impact of the hog production cost savings initiative and the sale of non-core hog farms in fiscal 2011. As planned, the cost savings initiative volume will begin to recover this summer. Gross profit margins for the third quarter was 11%, down from 14% in the third quarter last year. The most significant reason for the gross profit decline was an erosion of fresh meat operating margins.

Consolidated operating profit followed a similar pattern of a moderate decline from last year's outstanding performance. After consideration for appropriate non-GAAP adjustments, total operating profit declined in the recent third quarter to 6% from 8% in Q3 last year, and 7% in our most recent second quarter. For fiscal 2012, the nine-months year-to-date adjusted operating profit was 7% compared to 8% last year, principally due to the reduction towards normalized fresh meat margins.

Third quarter pork group segment operating profits declined $59 million to $196 million. This was principally due to a $52 million decline in fresh pork operating profits. Strong margins in packaged meats translated to a solid operating profit of $117 million, with a $0.15 profit per pound, at the high end of the normalized range but down $0.01 from last year's quarterly results. We are very pleased that in the face of lower total industry packaged meats volume, we maintain tonnage equal to the same period a year ago in our highly important core brands, representing over half our total package meat sales. No one is ever pleased to report a total package meat volume decline of 1%, however in the face of a 2% to 3% decline in overall industry volume, we believe we gained share in a difficult market environment.

We are very satisfied that while we saw another quarter with packaged meats raw material price increases, our brands and new consumer marketing efforts enable us to recover substantially all of the increased cost of goods sold. We believe we will continue to return packaged meats results at the high end of the normalized range for the balance of this year. We believe we have made great strides in building a much stronger packaged meats business. We are investing in new capacity and promoting our brands on a coordinated basis, with a goal to increase tonnage, gain share, and grow profits as consumer confidence and more normal spending resumes. We have supported our core brands with over a 20% increase in MAP spending for the first nine months of this year.

With regard to fresh pork, I've been in the meat business for a long time, and I never thought I'd be disappointed with fresh pork results when operating profits were over $10 per head, and above the normalized range. The fresh pork operating profit fell 40% to $79 million from last year's third-quarter record. USDA fresh pork cut out values increased 11% quarter-over-quarter, supported by strong general export demand and sales to China. However, packer margins were squeezed by a 23% increase in the ISM live hog price, reducing margins both compared to a year ago, as well as to the immediate prior quarter. Fresh pork margins are choppy and continue to be under some pressure, but we believe we'll produce results above the normalized range for the full fiscal year.

Third-quarter hog production operating profits declined $4 million year-over-year as per-head hog losses increased from $1 per head to $2 this year. Higher grain prices drove raising costs from $52 per hundredweight in Q3 a year ago to $64 this year. We have a current outlook for raising costs that remains in the mid-$60s short-term. The results in the third quarter of both this and last year reflects seasonal price weakness in the Fall/Winter period. We expect a rebound in the fourth quarter.

Included in our international segment results in this third quarter is a $39 million non-cash charge for our equity interest in the Campofrio Food Group. The Campofrio Board recently announced a multi-year comprehensive business and profit improvement plan. Our 37% ownership stake resulted in a non-cash equity method charge of $39 million or $0.18 per share. The program, successfully implemented, will significantly improve long-term results through improved efficiencies, increased utilization and growth. We do not anticipate any remarkable impact on our share of earnings from this initiative over the next 12 to 15 months. We applaud management's efforts and share our whole-hearted support for this project.

International segment operating profits for this recent quarter was $6 million, including the $39 million Campofrio charge. Excluding this unusual item, operating profit would have been approximately $45 million, setting a new third-quarter record and surpassing last year's $35 million profit. Overall, these improved results were led by strong profitability across all overseas hog production operations in Poland, Romania and JVs in Mexico. We're very pleased with the performance rebound in the international segment, and we expect to continue strong results for the balance of the year.

The year-over-year comparison of third-quarter corporate segment is not meaningful on its face, due to last year's inclusion of the $121 million insurance gain. Corporate segment quarterly expenses are nominally lower on an apples-to-apples basis. Income from affiliates declined $37 million, due almost entirely to the $39 million Campofrio charge. Third-quarter SG&A declined $33 million or 15% year-over-year, principally due to lower compensation and pension expense. Quarterly interest declined 30% year-over-year due to lower borrowings and more favorable rates.

Our effective tax rate for the third quarter was 36%, spiking up from 31% in our last quarter due in large part to the tax impact of the Campofrio charges. We continue to expect the full-year effective tax rate to be between 32% and 34%. Depreciation for the quarter was $59 million. We anticipate full-year depreciation to be about $240 million. Full-year capital expenditures are estimated to be approximately $300 million as we invest modestly above depreciation levels to enhance our package meats capabilities. We ended the third quarter with $1.2 billion in liquidity, including $164 million in cash, even after repaying all outstanding short-term borrowings during the quarter.

During the recent quarter, we bought $23 million face value of our 2014 10% bonds, triggering the recording of a $5 million in early debt extinguishment charges. These charges represent $0.02 per share. Strong earnings and cash flow in this fiscal year, on top of record results last year, have continued to demonstrate solid credit metrics. Net debt to capitalization improved to 34%, the lowest level in anyone's memory, 12 months trailing debt to EBITDA adjusted ratio ticked down to 1.7 to 1 and EBITDA interest coverage clocked in at 5 to 1.

The strength of these improved credit metrics continue to be recognized by the rating agencies. During the quarter we received an upgrade from Fitch rating agency, two notches to BB. This is the sixth rating upgrade from the collective rating community over the last 12 months. We do not have any domestic repayment requirements until May of 2013. We intend to invest in growing our business segments and investing in our core brands.

Wrapping up my remarks, we are pleased with a strong quarter and nine-months performance. Industry fundamentals remain strong, domestic economic indicators seem to have finally bottomed out. We are particularly happy with profitable growth in market share in our core brands. Our core brands have continued to perform despite difficult demand conditions. We anticipate margins will remain in the normalized range for the year.

Enhanced marketing, focused on product innovation, convenience and health is gaining traction with our consumers. We continue to see export demand supporting fresh meat profits. We expect hog production profits should appreciate from winter lows and fundamentals in the hog production models throughout the industry predict profits throughout 2012 calendar. International results will continue to show strong performance. We believe we'll finish this year with continued good results.

We're well positioned for another strong year in fiscal 2013. We will continue to concentrate on balance sheet, capacity development and cost reductions, improve the international results and focus on core brands. Thank you, ladies and gentlemen for your time and attention, now, back to Larry.

Thank you, Bo, I think that was a good report and I think Bo gives a lot more color to some of my comments. Looking beyond, into the fourth quarter and beyond, I think you're all aware that protein, both beef and poultry looks to be down going forward. Pork might be up slightly, so the fundamentals of this business are very strong as we look into calendar 2012 and knowing the beef cycle, it's well beyond even that. So that certainly means our protein is going to be favorable and beef is likely going to be more expensive and so is poultry so that's going to help the pork industry.

There does not, as you saw the pig crop report in December, there doesn't appear to be much growth in the US, maybe slightly. Europe is not having much. China is debatable, whether it's up or down, but I don't think it's going to be significant. I think the data coming out of there is pretty sketchy and not easy to get a good, firm handle on the expansion or contraction. But the bottom line is, my discussions with people in that part of the world, is the demand for US pork is continuing to be very interesting. How about that? And they're certainly not open to their plans, but they are certainly very open to talking about it, so that's a good sign, I think as you look at the Chinese market.

I see no change in this US dollar policy, which means we're going to have US dollars are going to be cheap, so our pork is going to be cheap on a relative basis. We think these tariffs will be coming down, the USDA has predicted exports will be up for this calendar year, so that bodes well for the industry. The free-trade agreement goes into effect. There is a general trend towards lowering tariffs related to our product. The grain markets look to be coming our direction. The hog market is certainly looking favorable, even into the Fall, and where the markets are not favorable, we've put hedges in place. So I'm not so terribly worried about the live production side of the business. I think we've taken some measures to protect our business there. I think that we feel comfortable we're going to be okay on the live production side, regardless of what happens, and I think it's going to be coming to us.

I would tell you that we are not happy with where we're at. We think we have a lot of opportunity to improve our brands and invest and grow the equity of these brands, the one fly in the ointment is the US retail market is not growing. From many of the categories, many of us in the industry play in, so we've got to create new products to create demand for those categories, and we know that. And we have a number of people involved in just that project, so we are not blindly hoping that we can simply take share by some aggressive pricing programs. We're going to do it the old-fashioned way by creating new products that consumers want, and I think that we're doing that and I think we've got a lot there.

Beyond that, we compare ourselves with others in the industry and data we have access to across our own businesses, and we have a lot of opportunity to lower our cost and improve our margins and it is identified. We are on it, so I think that whether it's in the meat processing side of the business or the live production side of the business, or the international side of the business, we know what to do. From a management standpoint, you're betting on us, if you buy the stock, that we can execute it. I hope we've shown you in the past that we think we can.

We've got an excellent balance sheet, as Bo said. We have excellent liquidity. We have access to the capital markets if we want them. We don't need them. We've got money in the bank, the balance sheet is strong and getting stronger, so I think we are in a position where we can have a lot of flexibility to do what we want to do to grow this business, and I'm excited about that.

We will continue to focus on these brands, brands, brands. I hope you see us talk to you again, and again, and again, how we're moving away from a discussion about nothing but the grains and the hog business because we're protecting that with the futures, and talk about the brands and the products. That's where we think this business has the potential to grow. We're going to continue to talk about that, and try to assure to you again and again that we're taking protective measures when it comes to the commodities. We've demonstrated with our brands we can pass through cost into pricing and that will continue to be an issue as some of this product even gets more expensive.

So it's a bright future. I'm extremely optimistic. I think the rest of the year is going to be good. You can't see but so far in this business and fresh pork is volatile, but the fundamentals are very good for us, and I'm very pleased as I report to you this morning. With that being said, Keira, we'll open up the 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 Instructions). Our first question will come from the line of Christina McGlone. Please go ahead.

I guess I just wanted to clarify something. Larry, you talked about a strong holiday ham season, and you've talk about very strong exports, but when I look at the pork cut out, it looks like it's not exhibiting the typical seasonal strength that we see at this time of year, so can you reconcile that for me?

Well, Christina let's be clear. The Fall holiday ham season is the October, November, and December period. Our fresh pork results were excellent in October, November and December.

I thought you were referring to Easter, sorry.

Oh, no I said the Fall holiday season.

Okay.

And Easter is still around the corner, but Christina, you've got to understand that routinely, January and February are some of the worst months in the year for the fresh pork and we're nicely profitable in fresh pork. I'm not embarrassed by our fresh pork margins at all. Bo, do you have any comment?

You summed it up very well.

If I may follow-up, just usually in March, you start to see an uptick and we're not seeing that, so is it just too early to tell? I'm just wondering if maybe you're seeing stronger results than the overall industry?

Well, it is, I don't know if it's too early to tell. I don't know that our margins, the margins are certainly down from November and December, but our fresh pork margins are fine for this time of the year. Oftentimes it's not even gaining money. It would be unusual to be losing money in this time of the year, but no. And the exports continue to be not sure if that was your question, but exports continue to be extremely strong. In fact, we're shipping very large quantities of exports which support the market, so I know it's a touch weak, but my goodness, I think we've all changed the bar pretty far.

Okay, thank you. And next we go to the line of Diane Geissler. Please go ahead.

I have a lot of questions coming to me trying to disaggregate the benefits of the export markets and we've done a lot of work of pricing into Asia and China in particular, versus what you see in the US market, and I was just wondering of you could comment further on, Larry, in the past you've talked about we're seeing better prices in the export markets than for some of the stuff we can sell in the US. If you could just talk about that, because to Christina's point, I think obviously, you're running ahead of what the spot cut out is, and I'm just trying to aggregate how much of that is sort of export benefit, and then what's the longevity of that, and how much is from the stuff you've done internally to make yourself more efficient and that's kind of like a longstanding improvement of the base business.

Well, Diane, I think I would start off by telling you we're now looking at the export markets as a trade channel, and that's important. Number 2, you need to understand that every time we do an export sale, it is at a margin enhancement. We don't see that as an opportunity to get rid of excess product on the domestic market. We see it as an opportunity to improve our margins. And I will tell you that beyond that, our export customers appreciate some of the things we do on the farm a lot more than our domestic customers, and I think you probably heard that from many other people in this industry. They want to know the programs and the feed regimens and the genetics and as well, they ask for specialized packaging programs that our retail customers in the US don't care so much about.

Now, that being said, this industry is killing a lot of hogs, and so we need these exports or else this thing is going to fall flat on its face. I don't see a lot of risk to that today, in fact it seems to be going the other direction, with the free-trade agreements going into effect, cheap US dollars, the USDA projecting that. It's a clearly a positive in this business. It's always a risk, but it's a positive at this point. We do focus on the export markets like we never have before as a Company, and we do sell programs to our export customers, not just products, so I think that does help us.

Do you see the April quarter as stronger than the January quarter? Is that what I should be reading into your commentary about how you normally dip in the January-February period and then things improve? Should the April quarter in terms of profits be better than the January quarter then, in fresh pork?

Want to answer that, Bo?

As I indicated in my remarks, we continue to be under pressure compared to where we were perhaps 6 months ago in fresh pork, so it is a difficult environment that we're working on out there, but I believe that I indicated in my comments that we will be above normalized range for the full year. We will probably take some choppy activity between now and the end of April in that time period, but we're still confident of the full-year results. I think in terms of the comment about longevity of exports, and I don't think anybody can underscore the fragile nature of that as Larry has time and time again over these calls but its been our responsibility and our charge to really expand the market base. And we're selling pork products today from this country to other areas of the world we never did before, in terms of Smithfield at least, and that includes things like Panama, includes things like Colombia, that help us spread that base.

At the same time we're investing in assets in overseas areas. We've got our people in China. We've got our people in Mexico. We've got people throughout Asia and Japan that we didn't have before, and that's helping pull this product through the channels and give us better insight and understanding of what's happening in those international marketplaces, and better able to sell product.

Diane and I'm not going to, I don't want to mislead you in any way. I don't expect the fourth-quarter fresh pork results to equal the third-quarter fresh pork results. We had excellent November and December as we were shipping giant volumes out of this country into one Asian country, which you can probably likely guess, and that volume is not there today, so I want to be very clear that the margins in the fourth quarter on fresh pork, I do not expect to be equal to the third-quarter fresh pork. So let me be crystal clear with that, if you're getting some misunderstanding there, but that does not mean the fresh pork results in the fourth quarter are going to be bad, quite the opposite. But I don't think, given where we are November and December, I don't believe that we're going to equal those kinds of margins in the fourth quarter.

Thank you. Our next question will come from the line of Akshay Jagdale. Please go ahead.

Good morning, this is actually [Rohan Patkar] in for Akshay. My question is regarding packaged meat volume. Last quarter you guided to a 3% increase, and it seems as though volumes came in lighter than expected this quarter. Can you please explain why volumes came in weaker than expected and what your expectations are for the fourth quarter and for fiscal 2013?

They did come in below what we expected. I could tell you that, we were somewhat surprised at how the retail, some of the retail business has suffered a bit, food service is up. The whole industry sees the exact same thing. The others in the industry reported before us, for some time I was concerned that ours was worse than the industry as I've seen the others present, we're actually better than the industry. So I think there is a shift a little bit away from the retail market and in fact the food service, if you remember in the second quarter we were talking about the fact that our food service had a good first quarter, a bad second quarter and now food service is having a better third quarter and back away from the retail. Smithfield is a 75% retail company, so we feel some of the retail impacts different than others, so I think we are having to modify. We did have plans in place to move our core brands up 3% for the year, but I don't think we're going to be able to accomplish it. I think the reality of it, whether it's $4 gasoline or higher price raw materials, the reality is it's going to be hard to do.

I'd like to also point out industry information about what is happening within the packaged meats area difficult to get precise data on a realtime basis but I think we've been benefited by some of the analysts out there that can do some work for us. I think even your own organization had indicated that packaged meats volume for the industry was down somewhere between 2% to 3% and there for we look at our decrease of only 1% as really being a pick-up in market share, so while we think the overall market was down, we were less than the market in terms of fall off and we look at that as a positive trend and some very difficult market conditions.

So we look at the IRI data, the product categories we compete in, and our numbers very favorable to that. I don't like the overall numbers but I like our comparison to the numbers, and so I can only like it if the people shifting away from retail towards food service and the fact that people's dollars are being stretched, and you are seeing package size changes from 16 ounces back to 14 ounces to control price points at the retail case and I understand retailers wanting to do that, and so I think it's just a natural part of the business. We will react to that.

I'd also like to underscore, as you look at the competitive structure out there, I think there were fall-offs in volume in several of the major competitors, and I think we probably had the least drop-off, at least from the statistical evidence we've seen so far compared to our competitors.

Sure, thank you very much. That was very helpful, and if I can just ask one more quick question on international EBIT, third quarter was ahead of expectations and on the run rate basis, well ahead of the top end of your normalized range of $50 million to $125 million, what are your expectations for fourth quarter and for 2013, we would appreciate it if we could get some color on this.

Well, this is the second question, so we would rather not make this a pattern, but as I'd indicated in my remarks that we do continue to see strong results. The big pick up we've had this year over last year has been in the hog production area, and we continue to have a good balance between grain costs and live markets in western and eastern Europe. So it should remain strong.

Thank you. (Operator Instructions). We now go to the line of Christine McCracken. Please go ahead.

Larry, exports have been a big part of the story I think for the last year, and it sounds like it's going to probably pick up here going forward. I'm just wondering, now as a percentage of your fresh pork sales, where are you in terms as a percentage?

I would tell you, Christine, that we are essentially sort of 30% to a third, depending on where you are in calculating that. It's become a very big piece of the business, and so I would have used my phrase of hooked on heroin a number of times, and I'll continue to use that, but it looks like it's here to stay. And looks like it could continue with these kinds of percentages, certainly above 25% for this industry, I think could be the go-forward, it could be the whole industry on a go-forward basis and will ebb and flow depending on whether we get some of these special arrangements. But its gotten to be for the last while, its gotten to be a bigger piece, we're getting more than our fair share of the industry, because of some of the things we can provide exports, so it's a big piece, Christine.

Thank you. Next we go to the line of Farha Aslam. Please go ahead.

When you look at your hog production area, possibly one of the reasons your fresh pork margins are a little bit weaker in the April quarter are because of high hog prices, but you guys are vertically integrated, so could you share with us kind of the profit outlook that you're seeing in hog production? Where you think those profit per head is over the next few quarters, and kind of what you think that normalized profit per head is?

I guess going backwards from the several questions you've asked, I apologize. We continue to maintain that our pork production will be in the normalized range in terms of overall profitability for this year, and at this point, we're developing our budgets for next year, so it will be a little premature to talk about fiscal 2013. We'll do that more as we get into this particular quarter and more in the next call. But in terms of where we think that will run on a sequential basis, we believe we'll have a pick-up in profitability in hog production in Q4 versus Q3. Seasonally it happens that way, and it's really going to be the ability to pass on that higher cost through the fresh meat complex and hopefully into processed meats as well. So we think that we'll probably follow a similar pattern to what we've seen in the past in that we'll pick up in our hog production profits, putting a little pressure on fresh pork margins we move towards April, but you've got some good holiday ham seasons coming up with Easter, as was mentioned earlier in the call. And exports continue to, volume continues to help be very supportive of fresh pork, so I think it's really a continuation of the trends we see so far this year.

I'd be surprised if we didn't move into fourth quarter our hog production back into the normalized range. Where we lost money in the third quarter, we'll likely move back into the normalized range as well as I look at the futures markets today and that changes. You guys know that, and we are more heavily hedged on our grain side than we are on the live hog price side. It looks to me today that we should be profitable every quarter hog production next fiscal year. Bo, you agree with that?

I agree with that. It will be tight in Q3 as it always is, and there are lots of things that could impact that.

As of right now we should be profitable every quarter next year in hog raising.

Thank you. Next we go to the line of Heather Jones. Please go ahead.

Regarding Campofrio, they had a really strong Q4 and they recently offered guidance for significant margin improvement from now through fiscal 2015. And wondering do you anticipate that significantly benefiting your fiscal 2013 results and would this make you more interested taking another consideration of increasing your interest there, given their profit improvement plan.

Well, Heather I'm going to tell you that I would not comment on whether we're going to make a further investment in Campofrio think that I will tell you that we are pleased by the actions they have taken. I think Bo said in his comments that we don't expect any near-term impacts for next fiscal year on our earnings or our equity portion of that. And incidentally, as you read their numbers, you can not literally take their numbers and multiply by 37% and apply it to our P&L, because of the differences between European accounting and US accounting. And as well, we have a different carrying value on our books than they have on their books. You should understand that, so it is certainly in the range, but it's not literally the way you calculate it.

However, I think this is a positive. I think they do have a situation where they could take, this could significantly improve their earnings, and they certainly got a multi-year projection. I would refer your questions to them, they are a publicly-traded Company. I'm not going to speak for Campofrio, except that as a big shareholder, this is something we applaud and have been pushing for some time and we applaud the decisions. I think it's positive for our ownership and it's positive for the whole relationship.

And I know there have been a number of questions about the Campofrio plan. As Larry said, we aren't going to comment on other public company's specifics and details. However, they did have an Investor Day program that they put on this last Monday, that may be, I'm sure you can find it on their website, but we'll try to make that available on our website before the end of the day, so if anybody wants to tack a look at what they told their financial community in Europe, we'll make it available to you.

It's a good idea, Bo. Very good idea.

Thank you. Next we'll go to the line of Ann Gurkin. Please go ahead.

I wanted to follow-up on the comment in your release about delivering, expecting to deliver consistently solid results in fiscal 2013. Does that mean, kind of what's underlying that statement, do you expect to hit your targets by segments in fiscal 2013? Can you help me understand what's supporting that statement?

Ann, I'm speaking and Bo can have his own comment. I'm speaking more about the fundamentals. The fundamentals in the industry are good, both exports and the hog production side of the business. The fundamentals are there, so I think within the context of the fundamentals.

And as I mentioned earlier, we go through our budgeting process for the next fiscal year at the beginning of the fourth quarter, so we're just getting into that but I don't see anything out there, as Larry says, from a fundamental perspective, it shouldn't allow us to generally deliver our normalized margins in all our segments next year.

And I think the relationship we have with customers and our packages meats focus, we've done extremely well in an environment where our raw material is much higher. So again, I will say it again, the fundamentals in what we're doing seem pretty good to me, Ann.

Thank you. Next we go to the line of Ken Zaslow. Please go ahead.

Could you just talk about, you kind of alluded to it a little bit but could you talk a little bit more about, is anything structurally changed in the international business that we could get a little bit more confident that look in 2013, that you guys are on your way to hitting normalized or higher than that, given what's happening in the third quarter. Can you just talk to that point about the international business and just the fundamentals in the industry or that you guys are doing something? How about that a little bit just so we can get a little bit more confidence in saying look, your number for 2013 are more than doable.

Ken, let me make two real quick comments and Bo can add anything he wants. The change in Campofrio, the decisions they've made are positive, so that's positive for that business. Number 2, we've got export license in Romania, where we've been struggling with that business since we made these investments. So these two countries are positive, and Mexico is fine, and Poland is fine, and I don't see any growth in live production supplies to speak of in Europe which should bode well for the live production side of the business, and that's sort of general. Bo, do you have anything to add to that?

I think you can look at almost every segment of our business that we have. If you start at the very fundamental area, Larry pointed out the futures strip is very friendly to hog production as we look out for the balance of calendar 2012. If you look at the fresh pork side and the export side, Europe is going to be down somewhere in their fresh pork supply, somewhere between 1% to 2% as we look at the next 6, 9, 12 months. That bodes very well for us in the export markets, because frankly Europe is our major competitor there, so if they aren't as active because of short supplies it will create opportunities for us. And on the packaged meat side--

He's asking about international.

Well why do we feel the way we do about the whole segment? I think that you're going to start to see traction greater traction coming to bear from our marketing efforts and our promotional spend that we've increased this year significantly over last year, so I think there are positive elements affecting the fundamentals in every part of our business looking forward.

Thank you. Next we go to the line of Ken Goldman. Please go ahead.

I only get one question, I'll make it a long one. Forgive me but Bo, you commented recently at a conference about Sara Lee's meat business and I think if I'm reading the transcript right, you mentioned you might take a look at it if and when it comes for sale, but you do seem to think it's going to go under a lot of interest. Can you add a bit of color to that? Not necessarily regarding Sara Lee directly, although that would be welcome obviously, but really how you see your desire to add brands via acquisitions right now? And I'm asking for a couple reasons, not only because of acquisitions always being of interest, but also you're announcing higher advertising, higher CapEx on brands, I think some additional R&D spending today and maybe that suggests you're comfortable with the brands you have now as platforms off which to innovate and market. So maybe you don't need an acquisition if that's the case? I'm just curious how you're thinking about that balance today.

I'm going to make a comment and Bo can respond, but I do have a lot of confidence in our brands. I do think we've made changes in the equity of our brands and the strength of these brands. We are building on those brands. We are not assuming we have to have an acquisition in order to grow this business. I'm not assuming that, and so I'm going to take that as a base comment, and you ought to build on that, but Bo, I don't know what you said to them about Sara Lee so I'll have to refer that question to you.

I said I can't go more than 3 days at a time before I have a major New York investment bank or other bank coming to us to say boy we would love to represent you in a Sara Lee acquisition. So I think that to some degree the comments I made were reflective of not necessarily our activities, but the activities of people in the community in New York trying to make a buck off the thing. So I can't believe that once it goes on the block that we're not going to everybody in the world try to sell us Sara Lee. I don't think necessarily we'll have to go to the table. I think the table will come to us, so everybody is going to look at it. We will.

There are many people out there that might have a greater interest in it than we do. It does fit in the brand portfolio because we don't have a lot of breakfast sausage, branded breakfast sausage that we compete directly with Sara Lee, so it is compatible in that regard. But in terms of acquisitions, we grew as a acquisitive Company through the 1980s and through the 1990s but back three years ago, we unplugged the phone as far as acquisitions were concerned. It wasn't a practical thing. We are now answering the phone, but frankly, good value is hard to come by at this point.

Thank you. Next we go to the line of Tim Ramey. Please go ahead.

Larry, you mentioned tariffs are coming down, and I don't know whether you're referring to stuff that's already announced, or stuff that you see kind of moving in the right direction from a trade talk perspective. Can you elaborate on that?

Well I was really, Tim, I was really relating to the free-trade agreements that had just been signed. And as well we're sitting in some other countries where there's a lot of discussion, and even in Japan there's a discussion going on with this specific partnership, discussion about whether there will be a change in the whole gate price system for Japan. There are significant tariffs between here and China, that with the Chinese move towards more imported product, I think there will continue to be pressure on that front if they want to solve their deficit problem that the discussions around tariffs will continue to build, so I think that's a positive from that standpoint. There's nothing firm on that front, except just the generalized pressure, so I think -- and there's a generalized trend towards more free-trade in the world and pork is certainly one of those items in Asia that is the center of a conversation, so I think the whole move is coming our direction.

I'd also comment that there's two areas of the world in terms of our ability to arbitrage to areas like China, that we really don't have access to and that's one from Romania and Mexico, both of which do not have access to China, and we've been working with the various agencies in those governments to try to open those up. Typically, they've come at frankly more beneficial tariff relationships than what we've had from the United States. Mexico and Romania are both very friendly countries towards China and probably have a different structure than what we have, so that could be very beneficial once we get those markets opened up.

Thank you. Next we go to the line of Robert Moskow. Please go ahead.

Hi, thank you. I would like to know -- you mentioned the export license for Romania. Can you help me understand, are you producing at a low enough cost now in Romania to be competitive in the western European market, and is the quality good enough? And secondly, you also talked about evolving into, evolving the exports into a trade channel rather than opportunistic, and I wanted to get a little bit more color, Larry, on the investment that you're making into people, relationships, you talked about the integration of the organization as being a benefit there. I think you're kind of referring to Farmland, historically had very good relationships in Japan. But can you talk a little bit more about what investment you're making to make that into a trade channel?

Rob, let me take the second one, and then I'll give Bo Romania. We are investing in people, and that means putting people into countries to build those relationships, and as well a couple years ago, we put the Morrell, Farmland and Smithfield, all three international sales organizations together and put those working cooperatively, and together in terms of their emphasis and change they have on the market, and that's extremely important. Plus, we've taken the assets they had, the relationships, not just Farmland but the Morrell relationship and Smithfield relationships and have built upon those. We have people on the ground now in such places as Australia. But even beyond that we've made enormous inroads into Canada which is a country you don't think about very much on the packaged meat side of the business. We're becoming a force in packaged meats in a foreign country and with US product, that's not just taking a sale because a customer is there. That's building a branded program around that.

We have programs in Japan as all of the processors have, and we're expanding upon that as we go into China with programs that we could build upon with real people, not just deal with traders, and the final piece of that has got lots of potential if we could make it work is to deliver fresh pork into Beijing and Shanghai. We as a Company can do that. We do it every day into Tokyo. We can deliver chilled pork, never been frozen, and it sells at a substantial premium to the frozen market, and we have the ability to do that. We are testing that to see if it can work. It may not, it may take time. But it's important to have a relationship with the government. We have excellent relationships with the government officials. That sets us up to build something that others in the rest of the world can't compete with.

Europe can't ship chilled pork to China. Only the United States and Canada can really do that, and we've got the product and we've got the systems to put huge shelf life on that product, that allows us to access the market no one else can access. But we have to build a relationship through the customer to do that. So I hope that helps you, and we're going to continue to invest in people and programs in those foreign countries to make it sustainable. Bo, why don't you answer Romania?

Sure and those of you that have followed the history of the Company and know a little bit about what's going on there, we had a very difficult time about 5 years ago from a health perspective, and it's very pleasing to say that is all behind us, and the performance of our herd in Romania is excellent, some of the best performance anywhere in the world for us. It also has the cheapest source of grain, so all of the fundamentals that we went to Romania to try to implement are still there. They're still available to us.

But on the marketing side, for example, the Romanians, like the folks in Western Europe and the United States, don't eat all of the offal products they might in Asia and we know just from the prices that we get in China today from the United States, we back off the freight and make a similar equation from Romania, there's close to $6 to $8 per head pick-up just in the offal component alone of being able to access that market. Hungary has a higher carcass market by probably $0.10 a pound than what's in Romania, so there's tremendous opportunities and we are competitive there.

Folks, I think we're out of time. We don't like to put you up missing your next conference call and it's a minute or so after 10.00 AM. I'll tell you, we look forward to the fourth quarter and into fiscal 2013, the fundamentals look very favorable for us, and the long-term trend is positive. We'll have ups and downs in the quarter but I think this Company continues to migrate the right direction and thank you for your interest, and thank you for being available this morning. Have a good day.

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