Smithfield Foods Inc (SFD) 2014 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Smithfield Foods 2014 third-quarter earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Instructions will be given at that time. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Keira Lombardo. Please go ahead.

Hello and thank you for joining us today for Smithfield Foods' conference call for the third quarter of 2014. On our call today are Larry Pope, President and CEO; and Ken Sullivan, CFO. This is Keira Lombardo, SVP of Corporate Affairs.

We would like to caution you that in today's call, there may be forward-looking statements within the meaning of federal security laws. In light of the risks and uncertainties involved, we encourage you to read the forward-looking information section of the Company's 10-KT for the transition period from April 29, 2013, to December 29, 2013. You can access the 10-KT on our website at smithfieldfoods.com.

I will now turn the call over to Larry Pope. Larry?

Thank you very much, Keira. Good morning, ladies and gentlemen. Thank you all for joining on this nice, crisp fall morning.

We are pleased to report another record quarter for the Company. This is the third quarter in a row the Company has reported record profits. Obviously, that would result in a record nine months' profit. So it's been a very good year to be at Smithfield. It's been a terrific year to start the relationship between Smithfield and the WH Group. And we are very pleased with that the way that this merger has gone and the association between the Companies, between each other. We are working every day closer together.

It's also very rewarding as I look down the results for the Company that the profitability of each segment of the business has delivered better than the year before. That's for the quarter and for the year-to-date numbers.

What makes that especially pleasing to me is that we have been able to maintain and improve our margins in our Packaged Meats business, even in an environment of the highest raw material costs that many of us in this industry have ever seen. I've been in the business well over 30 years, and we've seen these spikes in these raw material costs this year unlike anything this industry has ever been associated with.

I never thought I would see live hog prices where I've seen, and I never thought I would see raw materials, hams, and bellies at the prices I have seen this year. And to see that we have been able to maintain our margins in that environment -- that's not just a result of us raising prices to customers. We realize we can't do but so much of that, and we have to be appreciative of price points.

But we have done a very good job on the manufacturing side of the business. And we continue to focus on the operational improvements in this business. And I am extremely pleased with the job this Company is doing in paying attention to our costs and improving our investments in our plants to continue our low-cost production and have a highly competitive cost structure.

And that gives me comfort that these margins will continue. And that has been the focus of the Company, as many of you know who have followed Smithfield for so many years. That is my mantra for Smithfield -- is that we will move towards a consumer packaged goods company, and we will be focused on the packaged meats side of the business. And so I'm very pleased with those results, as I have seen them go through the stress periods of high raw materials.

I'm also pleased that we have been able to pay down some debt. We have focused on paying down debt during this year. Ken will give you more color on that in his comments. But the fact is, even with the investments that we've made in our plant operations, we have made a significant reduction in our outstanding debt. And that continues to be a focus and a priority for the Company.

But it has been a tough year for our live production business. Most of you know PEDv hit us like it did the rest of the industry. We've suffered through those losses, and they show up in the volume numbers, both on our farming operations and in our meat processing operations. But the prices for live hogs has gone up enough to more than cover that, and it has been a very good year to be in the live hog production business. And we are delivering some extremely good numbers there.

Before I turn it over to Ken, I'll be brief with my comments. I think looking forward, the Company continues its march towards a consumer packaged goods company. We continue to spend more money on consumer marketing. I'm pleased with what I'm getting out of that. It's showing up again, and again, and again, and again in our results in our packaged meats business.

We will continue to focus on that and strengthen the equity of our brands, as well as we will continue to make substantial investments in our plants to continue to improve our cost structure. And we are building a better relationship with the WH Group and our Shuanghui development folks internal to China. And we are realizing synergies through trading relationships and business relationships with our friends in China, and that is benefiting both of our businesses. So this has gone very, very well for us. And the Company is benefiting from the relationship and the association with our sister Company.

Live hogs had some PEDv breakups. As we said in the press release, we expect more hogs next year; probably expect higher levels of processing in the plants. That will probably mean lower live hog prices, but we have also got these record grain harvest this year. So grain costs are certainly going to be down, and our hog profitability we expect to continue to be solid for at least the next several quarters and maybe all through 2015.

With that being said, it's a good time to be here. I've enjoyed this year. I've enjoyed the relationship with the WH Group. I think the synergy is working. And Ken, I want to turn it over to you to give them a little more color.

All right, good. Thank you, Larry. Good morning, everybody, and thank you for dialing in. Before we get to numbers, I will cover a couple of administrative matters. First, for the past few quarters we have conducted these quarterly calls solely for the benefit of Smithfield bondholders and debt analysts. Today we have invited analysts that follow our parent company, the WH Group, to participate in this call.

WH Group is a Hong Kong-listed Company that reports only six-month and full-year results. Since they don't have a separate third-quarter call, we have invited those analysts to participate in today's call so they can ask questions about Smithfield's business. Therefore, we will entertain questions from all analysts, so long as they relate solely to the operations of Smithfield. Let me extend a warm welcome to the WH Group analysts that may be participating or listening to today's call.

As a reminder, questions about the broader the WH Group should be directed to WH Group's Investor Relations department in Hong Kong. Second, from an administrative standpoint, to the extent we have invited the WH Group analysts today, I want to remind everyone that Smithfield's stand-alone quarterly results are prepared in accordance with US GAAP, which is not the same basis as WH Group's consolidated reporting requirements.

WH Group reporting requirements are IFRS-based, and important differences exist in measuring the results of the business. These differences include biological assets accounting, pension accounting, and numerous P&L classification differences that affect, among other things, the measurement of gross profit and even the bottom line. So while Smithfield's stand-alone financial results are a good bellwether for the results included in WH Group's filings, they are not identical.

Now to the report. This morning we are again reporting very strong earnings. This is the third quarter in a row we are reporting record numbers. I'm pleased to report we have never had a better third quarter -- being July through September -- or first nine months of any year. Here are the numbers.

Sales increased 11% versus last year to $3.7 billion, principally on higher values across the entire pork chain and significant volume increases in our international meet operations. Second-quarter operating profits totaled $250 million versus $79 million last year. That's a threefold increase over the third quarter of last year.

Pretax profits totaled $211 million versus $45 million last year. That's more than a fourfold increase. After taxes are deducted, we are reporting net income of $155 million for the quarter versus $35 million last year.

Recapping the results on a year-to-date basis, the numbers for the first nine months are: sales for the first half totaled $10.9 billion versus $10 billion for the first nine months of 2013. That's an increase of over $900 million. More importantly, operating profits in the first nine months increased by $480 million to $707 million -- that's versus $227 million last year.

Pretax profits totaled $587 million versus $106 million last year. That's more than a fivefold increase over last year. Net income for the nine months ended September 28 totaled $404 million versus $86 million last year.

That's the high-level recap of the top-line figures. Here's a brief rundown of each of our operating segments. First, let's start with the only segment where we are reporting a loss: our Fresh Pork segment. Q3 operating loss in the Fresh Pork segment totaled $12.5 million compared to a loss last year of $23 million. While that represents a $10 million improvement year over year, it's still a loss. So what's driving it?

Well, the first thing is seasonality. Historically, the third quarter is not the best quarter for fresh meat profitability, so bear that in mind. Second, if you look behind the numbers, you will see a volume decline. The entire industry processed far fewer hogs this quarter than last year.

This is the PED hole that so many in the industry have talked about. We processed 9% fewer head, while the industry as a whole processed 8% fewer. The third quarter should be the low point for head loss attributable to PED. Obviously, volume loss of that magnitude does nothing to help overhead absorption, providing another headwind for the quarter.

Thirdly, the Fresh Pork complex this quarter was roiled by a choppy export environment. The closure of the Russian market in early August had a dramatic and sudden impact on prices, dropping the cutout more than $35 a head in just a few short weeks following the embargo.

For the third quarter the USDA cutout dropped precipitously in July; and export volumes, which were very robust in the first half of the year, fell as the markets adjusted to disruption caused by the Russian closure. In fact, total industry exports were down by almost 5% during the quarter.

Smithfield's export volumes fared better than the industry but were still down 1.5% for the quarter. These quarterly declines, however, were not steep enough to wipe out the first-half gains in export volumes. Indeed, export volumes remain up 7% for the year to date.

So putting it all together, we had lower meat values, fewer pigs because of PED, lower absorption of overhead, shrinking exports, and seasonal doldrums that all conspired to make this quarter trench warfare in Fresh Pork. And as we've maintained for several years now, profitability in the US Fresh Pork processing is strongly correlated to the health of the export markets.

With the Russian disruption behind us and US pork prices having moderated from historic highs, we should be better positioned moving into next year. With the relationship of pork prices in the US to prices in China reverting back to historical norms in the coming months -- at least, that's our expectation -- we expect the US-Sino pork trade will resume at greater levels. We remain excited about the synergy plans with our sister Company in the WH Group. While this is only a modest part of our pork production, we are excited about the programs we are developing and believe they are an important part of our growth going forward.

Beyond China, we are making investments in our trading platform and putting boots on the ground in several markets. We are very optimistic heading in 2015 that these investments will pay dividends for us as we try to capture more than our fair share of the export market.

Moving to Packaged Meats, our Q3 Packaged Meats results were a bright spot, with both volume growth and margin expansion on a year-over-year basis. Packaged Meats operating profits in Q3 totaled $111 million compared to $78 million last year. For the nine months operating profits totaled $330 million versus $296 million a year ago. Again, considering the extraordinary raw material environment we have experienced for most of 2014, we are satisfied, more than satisfied, with these results.

Last quarter we reported our Packaged Meats volume was up 6%. That increase was largely attributable to the late timing of the Easter holiday. In the third quarter our Packaged Meats volume is up again at nearly 4% compared to the comparable period last year, with volume gains in the retail and food service channels topping 5%.

Moreover, our branded volume is up more than 2% over the comparable period last year. From a product category standpoint, bacon is king and leading the way in almost all our performance metrics.

Also, the addition of the Nathan's hot dog business has been an outstanding addition to our branded product portfolio. For the quarter operating margins were 6% or $0.18 a pound, at the upper end of our normalized range. For the year our operating margins are 7%, demonstrating the resilience and strength of our brands in what might accurately be characterized as a very, very challenging environment of rapid and steep raw material cost increases.

Moving to the hog production side, the domestic hog production side of our business -- in the hog production segment, we are reporting another very strong quarter of profits. The operating result is more than $90 million above last year.

Operating profits in Q3 totaled $140 million compared to $49 million last year. On a year-to-date basis hog production profits totaled $278 million compared to $19 million for the first nine months of 2013. The number of pigs marketed is down significantly compared to the same period last year, although, as we note in the release, weights are up.

The same PED hole I mentioned in the fresh meat discussion is present in our live production operations. We marketed 14% fewer pigs in Q3 than we did in the same period last year. The third quarter marks the apex of a PED effect, and we expect pig numbers to build back towards normal levels in early 2015.

Of course, this assumes the virus will not reemerge this winter, something that is far from assured. We still have the virus, and the reality is we don't yet have a silver bullet. All industry participants are keeping a watchful eye for new breaks as the weather turns colder and the virus becomes more active.

Will PED affect pig numbers in 2015 the way it has in 2014? We don't know. We do know it has taken a significant bite out of pork production in the US, with year-to-date industry slaughter volume down 5%. There are still unaffected herds, and the impact on previously infected herds is uncertain. PED remains a wildcard. You will need to stay tuned.

In any case, our live production operations will have tailwinds associated with the bumper corn crop currently being harvested. Both corn and soybeans are trading at near five-year lows. These lower costs will have a significant impact on our raising costs, as feed comprises a substantial portion of the cost of raising the pig.

Indeed, these lower costs are already beginning to work their way through our system. Our Q3 raising costs declined to $0.65 a pound, or a decline of more than 7% compared to the same period last year. I expect we will have a 5 in front of our raising costs fairly early in 2015.

A reduction of this magnitude will have a very positive effect on profitability. Remember, it wasn't that long ago -- late summer/early fall of 2013 -- when our raising costs approximated $0.70 or $70 a hundredweight. So we could see as much as a $0.10 to $0.13 reduction in our cost structure from that high point a little over a year ago. To put that in context, a reduction of that magnitude translates to approximately $30 a head. We will get the benefit of lower feed grains, PED or no PED.

Finally, in terms of our live production results, I want to repeat what I've said for the last few quarters. Our risk management activities continue in full force, both this quarter and into the future. Our hedging activities represent an important tool in our effort to reduce volatility on the live side.

But hedging, by definition, means we will likely give up the tops and hopefully minimize the downturns. We did that last year on the live side, where our losses were significantly less than the industrywide losses. We're doing it again in 2014. We have taken steps to ensure very solid hog production profits in 2014 and beyond through our hedging program. We won't get the top of the market, but we will nonetheless have historically excellent profits on the live side.

Moving to the international segment, our international segment -- which is, as a reminder, comprised principally of our wholly-owned operations in Poland and Romania, as well as our Mexican joint ventures -- contributed $40 million in operating profits for the quarter. That's a $23 million improvement year over year.

On a year-to-date basis the international segment has contributed $111 million versus $35 million in the same period last year. As in the first two quarters, strong operating results from our live swine operations drove the Q3 increase.

Our live swine operations in Eastern Europe are well situated, both in terms of the investments we've made to modernize our farms as well as their proximity to feed grain production in that part of the world. Our raising costs in both Poland and Romania is amongst the lowest we have anywhere in our system.

Beyond the farms, we're particularly pleased with the gains our Polish meat operations have been making. They continue to improve their market position, with double-digit increases in sales volume. On a year-to-date basis sales volume is up over 20%. Clearly, our business there is growing and capturing all-important market share. As we have said before, our international segment has become a consistent contributor and represents a real platform for future growth.

Now let me turn to the balance sheet and financial ratios. Let me first address debt and working capital. For much of this year debt and working capital balances have been difficult to pin down. With historically high prices across the value chain and a very significant hedging portfolio, we have had a lot of drawdowns and repayments on our working capital lines.

Frankly, it has been a bit of a roller coaster. The undeniable trend, however, shows that we are delevering very, very quickly.

In particular, if we measure the debt repayment and leverage ratios from the date of the Shuanghui merger just 13 months ago through today, our progress has been very impressive. The oddity of the last year has been that debt balances seemed to spike near quarter-ends. The third quarter is no different. The balance sheet you will see in the third quarter 10-Q, which are filing today, is different from our balance sheet today -- less than 40 days since we printed it.

Let me give you all the figures right up through today. With the exception of the post Q3 figures, you will be able to find all of these in our filings, including -- and will be included in the 10-Q we are filing today. So let me get to the numbers. Here's a chronological recap of our debt figures, starting with what I'll call the opening balance sheet from last September that includes the $900 million in new bonds from the acquisition financing.

Smithfield's gross debt outstanding, including capital lease obligations as of the acquisition date in September, was $3.428 billion. So we started with $3.428 billion. By the end of December, the gross debt balance totaled just $3.046 billion. At the end of March, the gross debt balance swelled back to $3.342 billion because of working capital requirements.

At the end of June, the gross debt balance was $3.119 billion. And at the end of Q3, gross debt balances totaled $3.071 billion.

Bringing it current through today, however, November 7, our gross debt balance is approximately $2.8 billion. For those of you with a calculator, you will note that we have repaid nearly $650 million in the 13 short months since the acquisition.

On top of that, we have made pension contributions totaling $140 million, a good chunk of which was a voluntary prepayment. At the same time, our business performance and EBITDA levels have increased sharply, making the deleveraging story quite favorable. The key takeaway: we have reduced short-term borrowings by nearly $650 million since the merger date.

I told you on the last two quarterly calls I expected our gross debt outstanding to be less than $3 billion by the end of the year. As of today I'm pleased to report we have reached that milestone. And notwithstanding some of the choppiness we experienced earlier in the year, I don't expect working capital requirements to push that figure any higher between now and the end of the year, as we are in a period of inventory liquidation.

Liquidity -- in terms of liquidity, we ended the quarter with over $950 million of global liquidity. Today, however, our global liquidity position has improved to well north of $1.1 billion. We have a $1.3 billion domestic working capital line, with only $100 million of letters of credit issued against it and just $55 million drawn. Liquidity is a nonissue. We have no meaningful debt maturities anywhere on the horizon, so we expect to be in a very strong liquidity position for the foreseeable future.

Interest expense -- interest expense continues to decline sequentially. Expense for the quarter was $39.3 million compared to $40.4 million last quarter. Interest expense last year was $33.6 million. Of course, last year we did not yet have the $900 million bond financing.

For the year to date, interest expense totaled $120 million -- $120.5 million versus $121.3 million in the comparable period last year. Looking forward, I expect interest expense to be in the $160 million to $162 million range for the full year, based on current projected debt levels.

In terms of capital spending, capital spending for the first nine months of the year totaled approximately $188 million, a slower pace than we anticipated at the outset of the year. Still, we have a lot of capital projects in our pipeline, and spending has been accelerating over the last few months.

At this point, however, I do not see capital spending exceeding $300 million for the year. We are currently working through our budgeting process for 2015. We have a number of exciting projects both in our plants and on the farms that we will bring forward in the coming months. These projects run the gamut from leading-edge equipment installations to low-tech but innovative projects on our farms that have very nice paybacks. While we likely won't reach our investment goals for 2014, I'm satisfied we are being good stewards of the capital by investing only at a pace we can effectively manage. The WH Group supports our investments and is encouraging more growth spending.

Depreciation and amortization for the second quarter totaled approximately $58 million and was approximately $172 million for the first nine months of the year. I continue to expect full-year 2014 depreciation to be in the $230 million range.

Let me cover a few ratios. First, debt to capitalization -- our debt to capitalization ratio continues to improve. Debt to cap was 40.7% at the end of the third quarter. That's down from approximately 45% a year ago. I told you last quarter not to be surprised if this ratio had a 3 in front of it by the end of the year. Less than 40% debt to cap is an even greater likelihood now. Indeed, if measured today, we would peg it at 39%.

Equity at the end of September was $4.466 billion. In terms of leverage, our debt to EBITDA ratio continues to ratchet down. Continuing a year-long pattern, our quarterly EBITDA for the third quarter nearly doubled last year as a result.

Similarly, for the first nine months, EBITDA more than doubled versus the comparative period in 2013. On a trailing 12-month basis, we are well above the $1 billion mark. If I add back some of the merger-related charges, we are over the $1.1 billion mark on a trailing 12-month basis.

Our gross debt to EBITDA ratio as of the end of Q3 is 2.8 times compared to approximately 5 times at the time of the merger. If measured today with the debt reductions we've made since the end of the third quarter, our gross debt to EBITDA measure would be squarely in the mid-2s. Again, I think we predicted we would reach a leverage ratio below 3 by the end of the calendar 2014, and I am very pleased the goal was achieved a quarter sooner than forecast.

Interest coverage, like our leverage ratio, continues to improve rapidly, exceeding expectations of when we would meet these target levels. Based on trailing 12-month numbers, we are now covering interest more than 7 times, a vast improvement over a year ago. Covenants -- as I've done in the past, I won't cover these, because, quite simply, there are no covenant issues.

I think that provides a summation of the third quarter. And with that, Keira, I will turn it over. And I think Larry is prepared to answer some questions -- Larry and I are prepared to answer some questions.

Greg, please go ahead and open the line for questions. Thank you.

(Operator Instructions) Hale Holden from Barclays.

I had three quick ones. When we think about hog production margins going forward, with the potential increase in pigs but offset by lower feed costs, is it possible for you to maintain them in the kind of mid-to high double digits? Or should we see them -- kind of think about them returning to more historical levels?

I think those mid-double-digit numbers are less than $20 a head. But $10 to $20 a head, I think, is realistic. And we have taken some protective measures to try to guarantee part of that. So I think it's going to be solidly profitable, but not big numbers above that.

Okay, thank you. And then for packaged meats, you called out some distribution gains. I was wondering which brands you were seeing that in, or what kind of outlets you are seeing distribution gains in?

From a channel standpoint, both our retail and food service channels are up. From a branded standpoint, we are seeing some gains in our Kretschmar brand. We are seeing modest gains in our Farmland brand. And I would tell you there's a couple others -- I don't have all the sheets in front of me.

But the big play here is the Smithfield brand. Our bacon brands have really -- we've had a terrific year in our bacon business. I think many people know about the craze of taken in this country. We have benefited very handsomely. And when you ask people around the country who to the bacon and ham people are, they will tell you, it's Smithfield. And so we've had some very substantial gains in our Smithfield bacon business.

I think, Larry, our Eckrich smoked sausage brand is up nicely for the quarter.

It has done well, too. And all of that in the face of, as Ken and I both indicated, really pretty high raw material costs.

Okay. And then my last question -- you talked a little bit about the kind of puts and takes with global supply and potential to shift more imports to China. I was just wondering how the strengthening US dollar was affecting that outlook, or if that was going to have a material impact on it.

Obviously, a strengthening dollar is not going to help exports. That's a given. Having said that, what I would tell you is two things: one, our export program is broader than just China. And certainly, you can look at the FX between China and -- or the won and the US dollar. but I would tell you, our program is much broader than China.

The short answer to your question is: we are not expecting the dollar to have much of an impact on our plans. I said in my remarks that we are putting a lot more boots on the ground in a lot of different countries, and we are already seeing the benefits of those in terms of new business around the world, again, beyond China.

But let me make a comment about China. I think the markets between the US and China are changing radically. This year the US live hog market has been higher than the market in China. If you believe the data being published by the Chinese government, there are massive, there are massive sow reductions in China, in the range of 12%.

So we are expecting -- and you have got increasing numbers of hogs in the US. So we fully expect the relationship between the US market in the China market to completely reverse, particularly starting in the second half of next year. So I expect that, regardless of the strengthened dollar, they are going to have a completely different market dynamic come July of this coming year between the US and China.

Great. Thank you and congrats on a really excellent quarter.

Brian Hunt from Wells Fargo.

It's actually Dave Cook on for Brian. Can you quantify what kind of earnings you left on the table due to the hedges you have in place for the quarter?

I will tell you we will not. Hedging is part of our strategy. This is Larry Pope. This is my 10-year comment. Don't ask the question again.

Hedging is part of -- that's asking me, did we buy our grain correctly? And did you put a belly right for bacon? Our hedging position -- we didn't leave anything on the table. We hedged our program. And for those who are debtholders in this Company, they ought to be applauding us. As managing this business, it's part of our strategy to focus this business on the packaged meats and stabilize the profitability -- earnings stream of the hog production.

As Ken said in his comments, we will never get the top. And I will tell you, we left substantial dollars on the table this year. But we made those same dollars back last year in terms of the amount we reduced the losses from there. So looking across 24 months, what our hedging program did was exactly what it's supposed to do, which is stabilize the business.

And so we count it as a normal part of our business. And it's so complex between local buys and commodity trades, it's really quite difficult to actually calculate it. So I know that's a complicated answer to a simple question. But it is part of -- it's an embedded strategy of the Company.

Understood. Backing up to a higher level, can you address how you view the biggest threats to the business? Is it PEDv? Is it Russia? Is it a broader consumer shift away from pork due to price, or health and wellness? Can you talk about that a little bit?

The only thing I would say to the -- it's an industry discussion -- is that as an industry, we are exporting such a significant part of our business. It's important to have free trade arrangements around the globe, and it's important for us to maintain those open markets for the pork industry.

So if there is any threat, it's the geopolitical threat of markets closing, which is exactly what happened in Russia this year. And Smithfield has positioned our raising operations to take advantage of these export markets. We were shipping heavily into Russia, only to see a Malaysian airliner go down. And our exports into Russia dropped to zero overnight. So that's the threat, I would say, is the export.

On the domestic side of the business, consumers are not tracking away from pork. In fact, it seems like it's better than ever. And so I am pleased with our domestic business. But I hope that answers your question.

No, it does. I appreciate your time. Thanks.

(Operator Instructions) Jamaal O'Neal, Daily Press.

I am calling -- I had a couple of quick questions for you, I hope. One is you had mentioned earlier that you expect more hogs pending how this winter turns out in the PED virus. And that could mean higher processing at the plant. I just wanted to find out from you guys if that involves any of your facilities here in Smithfield or in North Carolina.

Jamaal, we certainly appreciate you dialing in. This actually is a call for investors. So (multiple speakers)

OH, I am so sorry.

After the call, I will respond to your questions. Thank you.

Lisa Deng from Goldman Sachs.

I've got two questions. Number one is on -- I think the statement that was made earlier to say that we followed hog production per-head profitability into 2015 or at least for several quarters. Can you talk us through what your hedging activities are into 2015 and how much confidence you have that we should expect reasonable -- and I think the range given was $10 to $20 per head for the entire 2015? That's question number one.

The second question comes from the view of management on the grain profits. So in the low corn and sloping prices -- do we expect this to also last through 2015? Or how do we expect this to perform into 2015?

In terms of 2015 hog production expectations, really it's more than just our own expectation. You can go out there and look at the futures markets, and you can see what the futures curves are. And they suggest pretty solid profitability in that range that Larry suggested. I will tell you, in terms of hedging, we are active hedgers. So we have indeed taken positions in 2015 to try and protect hog production profitability. And I will tell you, we have taken some fairly good positions at this point.

So, of course, it's a volatile space. And what it ends up towards the end of the year, we will have to see. But right now we are very comfortable with the numbers that Larry outlined in terms of in that range.

In terms of grain and what our expectation is into 2015, what you should know, Lisa, is that these cheap grain prices that we have now really won't impact our financial statements or will roll through our financial statements throughout 2015. That's got more to do with the production cycle of a pig in terms of -- if you think about from gestation all the way through market, you are feeding that pig. And that's over a 10-month period. So these feed grains that we are buying right now and these lower costs will filter all the way through 2015.

Okay, thank you.

Todd Harkrider From UBS.

Congratulations on a great quarter. I know a couple years ago you talked about consuming 128 million bushels of corn a year. Is that number still kind of fairly in the same ballpark?

Yes, Ken and I both, we talk about -- I believe the number is about 120 million.

That sounds good. And then you are generating a lot of free cash flow on a go-forward basis. And you have already reached your debt leverage target. What's the intent with free cash flow going forward?

I would say in terms of reaching the target -- I'm not sure I would characterize it as reaching the target as much as I would say that we reached what we thought we would reach by the end of 2014. In terms of going forward, we continue to have an emphasis on debt reduction. And we are not yet where we would like it to be or the WH Group would like us to be.

So we're going to continue to look at debt repayment options, of which there are some, in our portfolio. We've got a couple of pieces of debt that can easily be repaid. We've got some -- we've got options in that regard. So our focus will continue to be on debt reduction for the near-term future.

Sounds good. Thank you and congratulations again.

Lillian Lou from Morgan Stanley.

I have just one quick question regarding the fresh pork. You mentioned that next year we are expecting more export, and also you left money in the trading platform. So what level of realistic return for fresh pork for 2015 pertaining to your planning and expectation?

When you say return, are you asking us for a forecast of Fresh Pork profitability in 2015? If you are, I'm not sure we are in the business right now of making a forecast for 2015. I would just repeat what we said on the call, which is we are optimistic that in terms of trade volumes between the US and China, in particular, but beyond, are going to be more robust in 2015.

Okay, thank you.

Tiffany Fang from EOCI.

Just one question regarding the export sales. I want to know your export sales value and volume for the fresh pork business in the third quarter and the year-over-year change, and also the sales breakdown by different countries.

Tiffany, that's a detailed question that -- certainly I think we've got some information in our 10-Q today that may be helpful to you. And if you don't find what you need in the 10-Q, if you reach out either through WH Group investor relations or Keira Lombardo here, we can help you more with that question.

Okay.

And at this time there are no further questions.

Thank you very much. If you could please provide the replay information, that would be great. And we will end the call.

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