smithfield food first quarter earnings transcript 2008

F I N A L T R A N S C R I P T

SFD - Q1 2008 Smithfield Foods Earnings Conference Call

Event Date/Time: Aug. 23. 2007 / 9:00AM ET

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C O R P O R A T E P A R T I C I P A N T S

Jerry HostetterSmithfield Foods - IR

Larry PopeSmithfield Foods - President, CEO

Carey DubiosSmithfield Foods - CFO

Joe LuterSmithfield Foods - Chairman

C O N F E R E N C E C A L L P A R T I C I P A N T S

Jonathan FeeneyWachovia - Analyst

Reza VahabzadehLehman Brothers - Analyst

Christine McCrackenCleveland Research - Analyst

Timothy RameyD.A. Davidson - Analyst

Eric KatzmanDeutsche Bank - Analyst

Kenneth ZaslowBMO Capital Markets - Analyst

Pablo ZuanicJPMorgan - Analyst

Edgar RoeschBanc of America Securities - Analyst

Shazed AliSuntrust - Analyst

Oliver WoodStifel Nicolaus - Analyst

Ann GurkinDavenport - Analyst

P R E S E N T A T I O N

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Smithfield Foods first quarter conference call. At this time,all participants are in a listen-only mode. Later we will conduct a question and answer session. Instructions will be given at thattime. Should you require assistance during the call, please press star then zero. As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. Jerry Hostetter. Please go ahead.

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Aug. 23. 2007 / 9:00AM, SFD - Q1 2008 Smithfield Foods Earnings Conference Call



Jerry Hostetter - Smithfield Foods - IR

Good morning and welcome to a conference call to discuss Smithfield Foods' fiscal first quarter result. We'd like to caution youthat in today's call there may be forward-looking statements within the meaning of Federal Securities laws. In light of the risksand uncertainties involved, we encourage you to read the forward-looking information section of the Smithfield Foods form10-K for fiscal 2007.

I'd like to cover one administrative detail. During our last few calls, several analysts have not had an opportunity to ask questions.As a courtesy, we request that you ask only one follow-up question so that everyone can participate. Thank you.

With us today are Carey Dubois, Chief Financial Officer, Dick Poulson, Executive Vice President, Larry Pope, President and ChiefExecutive Officer, and Joe Luter, Chairman. This is Jerry Hostetter, head of Investor Relations. Larry Pope will begin our presentationwith the review of operations. Larry?

Larry Pope - Smithfield Foods - President, CEO

Thank you very much, Jerry, and good morning, ladies and gentlemen, and thank you for joining. I'm pleased to report thismorning our first quarter earnings income from continuing operations of $62 million or $0.47 a share compared with 39.9 millionor $0.36 a share in the same quarter last year. You will note that we are disclosing some discontinued operations in the firstquarter of both this year and last year at 7.5 million or $0.06 a share this year and 15.3 million or $0.14 in last year's for a netincome of 54.5 million and 24 -- versus 24.6 and $0.41 versus $0.22. The discontinued operations, I think, are fairly well spelledout in the press release, so I'll take questions on that if you'd like during the question and answer period, but at this point, I'llmove on and talk about the income from continuing operations.

As you look at these numbers, several things you should be aware of. This year's first quarter includes three acquisitions thatwere not in the first quarter of last year. Most recently, the Premium Standard Farms acquisition that was completed early inMay of this year and represents most of the quarter, about 12 weeks, we have the Premium Standard Farms both farmingoperations and the meat processing operations. In addition, we have the Armour-Eckrich business and the Butterball businessthat we acquired last October. A full quarter of that is in our pork processing members in the Other segment. And, finally, thejoint venture we put together with Oak Tree Capital Management Groupe Smithfield involving western Europe. That is now infor nearly a year, in fact, we just completed our first year of the joint venture. And, I'll talk about that being very successful. We'revery, very pleased with that.

I am pleased to say that both the Groupe Smithfield acquisition and the Amour-Eckrich and Butterball businesses have beenaccretive. Those were very nice acquisitions for this company, they have fit in very, very nicely into this, both in western Europeand complementing what we have. The Armour-Eckrich business under the Morrell oversight, not necessarily combined, hasdone extremely well in the changing of our Carolina Turkey business to the Butterball, carrying the Butterball brand and theButterball company name has been a strong success for us. I think of the earnings that we're showing here are demonstrativeof that point.

What is very pleasing to me as I look down the various segments of the business is all of the segments, if you look from pork tobeef to international to hog production and then other, which is essentially turkey, every one of those segments is up verynicely from the same quarter last year. So we have made progress on virtually every front in this business. In the pork segment,the fresh meat business has not been good. The first quarter is generally not good for fresh meat, it has not been good for us,the addition of Premium Standard Farms into the fold adds more pre -- larger fresh meat compliment to our business, and whenthe earnings are not good on the fresh meat side, that will be multiplied as a result of the PSF inclusion. So, the fresh porkbusiness was not good for us, and I've even seen other earnings from others who've shown some positive, I'm a little surprised,our fresh meat business has suffered and it is worse than last year.







On the other side, the offsetting impact of that is our processed meats business. That is extremely good, and it more than offsetany downturn in the fresh pork business with the upturn in the processed meats. We have a 26% increase in our total processmeats volume. That's spelled out in the press release. Even absent the Armour-Eckrich business, we still have a small increasein our processed meats business. We have significant growth in many of the categories that I've been talking about now formany quarters in terms of the fully cooked and more further processed categories. We have made very nice progress in those,those are nice margin categories for us.

As well, I've been talking to you now for more than a year about the fact that the Company has a net buyer of hams and bellies,and even with the inclusion of Premium Standard Farms, which does not have much in the way of processed meats, we are stilla net buyer of hams and bellies on a week in week out basis and a significant buyer. That gives us a great deal of latitude in theway in which we run our operations. We are not chasing the low margin overhead coverage processed meats business. We arerationalizing this business through our plant -- through several plant closings that we've had. We are walking away from businessthat does not make sense to us as simply a coverage of overhead. That is showing up in terms of the margins on these processedmeats. And I am extremely pleased with the continuing -- the continuing effort that we've made there and the success thatwe're achieving on that end of the business. Our precooked categories are just doing exceptionally well for us. I am very pleasedwith that end of the business. It's where I spend a great deal of my time, and I think it's showing up.

The beef side of the business is comparatively, again, strong in spite of the fact that we have cattle losses, raising loses on thecattle feeding side of the business. We do have losses. Our beef business, as the industry has seen improvement in beef, ourshas improved. I think we've been showing very favorably compared to the competition now for quite a long time. Even thoughcattle is higher, those cost increases have been passed on and the box beef complex is rewarding us with a margin and are verysatisfied with the beef side. I think we do have points of difference on the beef business. And I think that side of the business isvery solid for us.

On the international side of the business, to -- I spoke for just a second, the Groupe Smithfield joint venture we put togetherhas just done exceptionally well. It's running very, very good for us. We're now one year into this, and I couldn't be more pleased.Poland has turned very solidly, it's still not where it needs to be but it's significantly better than it was.

You probably have read that we do have a problem on our farms in Romania. Just a couple of weeks ago, we announced anoutbreak of classical swine fever on two of our farms. Just this week we got confirmation of an outbreak on the third farm, andwe are -- this is troubling to us. We have dispatched a number of our executives. Many people are on the ground. I think we aremanaging this as best we can. We are in a country where it is pervasive throughout the countryside. We didn't bring classicalswine fever to Romania. It was already there. The bio security issues in that country have got to be extraordinarily tight. Evenin that you want (inaudible) risk that something could happen.

I think it is -- we indicated in an earlier release that we thought the impact on terms of inventory writedowns would be 4 to $5million. I expect that number to be somewhat higher, although, not something that's so terribly objectionable. It does representa setback for us. It will slow us down. We were moving at a very fast pace in Romania. I've mentioned that a number of times.We will have to slow down as a result of this and change some of the ways in which these farms are run and operated and aregoing to have to stop some of our growth for probably the next 12 months as we deal with this. I don't want to overstate this.It is certainly taking a lot of our management time. We deal with these issues, I think, from an overall standpoint of SmithfieldFoods it's in the manageable category and it's certainly not threatening to the business in any kind of serious way.

On hog production side of the business, we are showing an improvement. It's only a modest improvement of 4 to $5 millionraising costs as we outlined in the press release. All up fairly significantly. Live hog prices have moved up as well. The full impactof the corn earlier in the year is now showing in the marketing of the animals to the plants. So we are seeing the full impact ofthe higher priced corn earlier in the year. That's now coming through in the selling of the animals into the plant. So, it doesshow up as substantially higher raising cost.







We have mentioned a number of times in the past that we put commodity hedging positions in place, and those have beensuccessful in moderating some of these cost increases. So those have helped offset [what all] cash raising costs by allowingthose to be offset through commodity -- through commodity hedges. You all know that we do this very regularly and routinely,we are significantly hedged far out, particularly on the grain side of the business. So the result of that is that our hog productionoperation, again, we do have the Premium Standard Farms numbers in there. They were profitable for the quarter, so theyhelped those numbers modestly, but all of our activities there and helped us to maintain the profitability on the hog productionside of the business.

From my standpoint, it's rewarding to see that all segments of the business are performing better than they did last year. Thefact that the processed meats side of the business is going as well as it is, is very gratifying to me. I think that's sustainable andsomething we've been working on for sometime. Admittedly, last year's numbers were not where they needed to be, so thecomparison for the last six quarters is not something I'm terribly pleased with. It shouldn't be a difficult comparison, because,I think the earnings last year were not where they should have been. But we have made a lot of progress in a lot of areas. I thinkit's showing up to you, particularly the concerns some of you on the international side of the business, the turkey side of thebusiness, the hog productions continue to be very profitable in this processed meats side. Those are significant comparisonsfrom the Company standpoint and I think they show the strength and the diversity of the earnings (inaudible) past.

Before I speak to you about where I think we are going forward. I'm going to turn it over to Carey Dubois, and let him go throughsome of his financial reports to you, and then, Cary, you can pass it back to me for a future look forward. Carey?

Carey Dubios - Smithfield Foods - CFO

Thank you, Larry. Before I begin with the financial review, I would like to first greet the analysts and investors on this call. I lookforward to meeting many of you in the months ahead. I was quite excited at the opportunities facing Smithfield when I joinedthe Company two and a half years ago, and I am even more excited with them today. I also wish to thank Larry and the Boardfor their confidence and support for this opportunity in taking the finance team forward.

Turning our attention to the first quarter financials, I wish to reiterate several points that Larry just made. There are several newentities with results have flowed to the first quarter financials. Those include Premium Standard Farms, the Groupe Smithfieldjoint venture, the Butterball business and the Armour-Eckrich business. And this is in comparison for the last years first quarter.Now speaking about last years first quarter, it is important to point out that those results included the numbers for the JeanCaby French business that was contributed into the Groupe Smithfield business. Last year the results to Jean Caby wereconsolidated into our results. This year, the results are included using the equity method of accounting along with the rest ofGroupe Smithfield.

Beginning with the income statement, sales for the quarter were $3.4 billion or 21.5% higher than the $2.8 billion for the firstquarter last year. Sales were up across most of the businesses. Our pork, hog production and beef segments, with the two formersegments benefiting largely from the incremental volume from the Armour-Eckrich and Premium Standard Farms acquisitions.The sale of our international segment were also edging higher for the quarter, as last years first quarters results excluded the$93 million in sales related to our Jean Caby business.

Selling general and business expenses were up $8 million or 5% over the same period last year. The increase in SG&A from theacquisitions was partially offset by positive currency translation gains and due to the fact that we are no longer including theexpenses of Jean Caby. Operating profit was $147 million up 48% from the $99 million a year ago. We experienced improvedearnings across all segments, due largely to our acquisition activity and to improve margins in our pork and beef segments.Having back depreciation and amortization of [$69] million, our earnings before interest, taxes, depreciation and amortizationwas $216 million this quarter versus $164 million last year, a 32% increase.







Our trailing 12-month basis EBITDA was $725 million versus last year's trailing 12-month number of $654 million. Interest expenserose 29% or $12 million over the same quarter last year. The increase was largely driven by an increase in our overall debt of$710 million over the past year, this (inaudible) was used primarily for financing activity related to Armour-Eckrich PremiumStandard Farms, and Groupe Smith field transactions, as well as for further investments and higher working capital needs inPoland, Romania and North Carolina.

There are two other noteworthy points relating to the income statement. First, and also noted by Larry, our Smithfield Bio Energyoperations were placed into discontinued operations in the fourth quarter of fiscal 2007 with the anticipation that these assetswould be sold as a single unit. After further effort in the disposal process, we now believe it is unlikely we can dispose of themin a single transaction. Accordingly, we bifurcated the assets for our [time] [purposes] and are taking an immediate after taximpairment of $6.7 million in our discontinued operations our (inaudible) biomethanol assets. At this time, we anticipate a gainwhen the remaining assets are sold.

Second, you will notice that we added a table to the press release, separately breaking out the results for three of our majorjoint ventures, which are currently included in the results of equity and income or loss of affiliates. This enhancement shouldprovide you with great transparency in understanding and evaluating the earnings contribution from our investments inButterball, Five Rivers Ranch Cattle Feeding and Groupe Smithfield. The tables show that our equity method investmentscontributed to a $25 million quarter over quarter improvement to operating profits. In reviewing the table and the correspondingline item on the income statement, I wish to note that the income is actually reflected as a negative number and that losses areshown as a positive number, in order for the result to tie into the format of the income statement.

Now taking a look at the balance sheet and cash flow statement, capital expenditures for the quarter were $109 million ascompared to our depreciation of $68 million. In terms of our debt, our overall debt level increased by approximately $320 millionin the quarter to $3.4 billion. The borrowings were used to finance a portion of the Premium Standard Farms transaction,investments in Poland and Romania and increases in working capital. The Premium Standard Farms acquisition was largelyfinanced with company stock, thereby increasing our outstanding common shares by almost 22 million shares. This has leadto an increase in shareholders equity by approximately $635 million over the quarter, which improve our debt to total capitalizationratio from 58% to 54%.

In the quarter, we also issued $500 million of new 10 year senior notes in June. The coupon on these notes was 7.75%. Themajority of the proceeds were used to term out revolver debt, temporarily encourage to finance long-term investment projects,as well as replenish credit facility capacity. We ended the quarter with over $450 million of available committed liquidity.

With that, I will turn it back over to Larry.


Thank you, Carey. Thats with a nice report. Looking forward. At one time, I'd make it (inaudible), I'll reiterate a point that theoutstanding shares that we've got, these earnings and the earnings per share, which I'm pleased with, reflect this additional20% dilution on the shares. So we've got these increased earnings per share even with this 20% increase in the number of shares.So I'm just saying that's part of the note to take note of.

Looking forward, we have not been pleased with the fresh pork numbers, and in fact, last year in our fall and winter season, Iwas not pleased with fresh meat results even then. I think I do expect, traditionally as we move into the cooler months andpeople go back to traditional eating, the demand for these products and fresh pork moves up significantly. I do expect someimprovement in fresh pork. Looks like we're going to have a good fall season in terms of the ham holiday season. I think that'sgoing to be solid.







On the cattle feeding side of the business, which has not been one of our stars, and we continue to lose money for some timenow, that is an improving situation. So, even in this quarter, our losses in cattle feeding were down significantly from last year'sfirst quarter. I expect the cattle feeding losses to continue to decline. Whether we'll see those, I believe they'll be fully profitablefor the year, but at this point, we're in a loss situation. I think cattle feeding is improving.

I think the international business exclusive of Romania is solid. I expect continued good results in Groupe Smithfield, goodresults in Romania and Mexico and Spain, and Romania will probably be a bit of a drag and will probably reporting earn -- bereporting losses on that for the next several quarters. I would expect all those, although I expect those to be in the moderatecategory.

Hog production, if the futures are any indication, and we've got north of $50 hogs, and in fact hogs seem to go -- hogs are goinghigher the farther out you look, our raising costs are going to be under $50. The hog market is above $50. So I think if thesemarkets are anywhere near right, corn is moderated from the $4 level back into the 350, 360, 370 level. So corn is not going tobe -- our corn costs are not going to be reflective of $4 corn going forward. So hog production, we've been on a long run herewhere hog production's been helping drive the earnings of this company and it looks like it's there for the next six or ninemonths it will continue to be there. So absent the Romanian situation, I think most of the pointers look positive here, and I thinklook forward to pretty good numbers for the next several quarters. And I expect we'll have a very solid full year. With that beingsaid, Jerry, I'll be glad to take questions.


[Greg], can we open the lines for question and answer, please?

Q U E S T I O N S A N D A N S W E R S

Operator

(OPERATOR INSTRUCTIONS) The first question comes from the line of Jonathan Feeney from Wachovia. Please go ahead.

Jonathan Feeney - Wachovia - Analyst

Thank you very much. Good morning.


Good morning.


Larry, I wanted to follow up on something you said. You talked about raising costs being beneath $50. That sounded like youhad some reasonable confidence in that for the current quarter and coming. So, I guess, is that a statement based on some ofthe corn hedging or forward buying that you've already done or is that just sort of a guesstimate as to where the market costof corn would be?








Jonathan, I would tell you this would be a repeat, I'm not going to give you our hedging position and I won't -- I'll stick to that.


You can't fault a guy for trying, though, right?


But my point to that, but I'm still going to answer your question, I think. We routinely are significantly hedged forward on corn,and so you take that statement however you like. Bottom line, I'm pretty darn confident our costs are going to be under $50provided the pigs live. (laughter) (inaudible) the pigs don't live, but absent that, I think we'll be under $50.


We're all have risks. One follow-up then, Larry. You may not have this number handy and if so, we could follow up offline, butif you took, what I see as spot corn prices of about $3.50 average daily price for the quarter, and you had to buy on the spotmarket at that price, would that be close to a $49 break even?


I think, Jonathan, it would even be below that.


Really? Okay.


All right?


Thank you very much.


Yes.

Operator

Your next question comes from the line of Reza Vahabzadeh from Lehman Brothers. Please go ahead.







Reza Vahabzadeh - Lehman Brothers - Analyst

Good morning.


Hi, Reza.


Morning, Reza.


Just on the exports fund. Exports have been slowing this year and been off in the last couple months and than inventories areup a little bit for frozen pork. Can you comment on that and how we should think about that?


I think the exports have been down, Reza, in the Mexican market. Our -- and the industries had a lower exports, our exportshave actually been up a little bit. We don't have much. Most of it's hams going -- the Mexican market is a lot of hams. We don'thave a lot of exports into Mexico because we don't have a lot of hams. What we do have, we send to western Europe into ourEuropean operations. But our exports have been solid on the Japanese front and into Russia, so our exports are up a bit.

And even what you're seeing in some of these reported exports, I think beef, I think the cold storage report said beef was down,chicken was down and pork was up about 10%. A lot of that is hams in the freezer. And we're a part of that issue. It's peoplewho put hams down for the fall holiday season, as we've done. We didn't do much of that last year. We had a different arrangementin terms of our hedge position last year relative to hams. We didn't take that this year, and in fact put the physical hams in thefreezer in order to protect ourselves from a market standpoint. So, I think a lot of that, in fact, I believe the July ham report thatI thought I saw here in the last day or so, was the highest level of hams ever reported in July in the cold storage. And we're apart of that. We're a significant part of that. So I think you're going to see a near term growth there and then those hams aregoing to come out, as you go into the fall season they're going to come out. I think that's what's driving the inventory levels.That's where our exports stand.


Does that exacerbate your concerns around a fresh pork margins and cut out values in general?


No, not really. Because, the freezer stock growth is hams that are there for the processed meats part of the business, for thesmoked ham business for the fall. So, it's independent of the fresh meat, although the other piece of that would be, hams area relatively cheap this year, and I don't know that I think that hams are going to go -- I think they'll clearly go up as we get intothe fall, I originally thought several months ago, that hams would reach a pretty high level. I'm not sure that hams are going torun away from us. That could hold -- that could cut out a little bit on the ham side this fall.








A housekeeping question for Carey. Carey, do you happen to have the revenue from acquisitions in this quarter or is the revenuegrowth percentage from acquisitions?


Reza, why don't you hold that question, and the guys will calculate it and we'll give you the answer here before we get off thecall.


Sounds good. Thank you.

Operator

Your next question comes from the line of Christine McCracken from Cleveland Research. Please go ahead.

Christine McCracken - Cleveland Research - Analyst

Good morning.


Good morning, Christine.


Just wanted to touch on China. Obviously there's been a lot of speculation around the potential for exports there given someof the shortfalls they've had. I'm wondering with the hog markets reacting like they are, if you could give us any idea on whatwe could expect into China? Obviously it's been a partner for you over the years on a much smaller scale, but is there anypotential for increased export to China?


Christine, on the first -- let me start on one thing in saying the (inaudible) and some of those are up for everybody. I think theshortage the problem in China, and e're getting more intelligence every day. I think there's a very real problem in China, and Iwon't speak to some of what's coming out of there from the government authorities, but some of that information is certainlyquestionable from my standpoint. I believe they have a very severe problem. It is just my opinion here, again, I've talked to anumber of people. I believe the problem could be as severe as 20% of their whole production. Given than they've got a 500million hog, hogs produced annually that could be a 100 million of hog shortage. That's as large as the whole U.S. production.So their problem could be our whole production, which means, if they have to solve even a part of that, it could be enormous.

With that being said, we have, I know it's been rumored in the press and the trade information about the fact that Smithfieldhas been having conversation. I can report to you today that we have been having substantial conversation with a very large,a very large Chinese trading company. In fact, it's the company COFCO. Those who know the industry know who they are, they'rea very large trader, not particularly meat traders, but they've been given a mandate from the Chinese government. We have







been having very substantial conversation with them about some sizable shipments, even this fall and winter into China. Wedo not have a deal as of this telephone call, but I can tell you that we have had very substantial conversations and they areongoing as we speak. So, I can't commit to you that something's going to happen, but I can commit to you that there is somebasis for the rumors, and we are actively working this issue. And in regards, I didn't fully answer your questions, but that's wherewe are.


It's as much as we can probably go on at this point. Just to follow up then. There's clearly been a few plants, you listed here, is[tied to, is that] company issues? I'm wondering, is this, in your view, kind of political negotiations to some extent or is it pushedback in the ractopamine issues? If you can comment on that, or if you are, in fact, trying to pull your (inaudible) and what thatmight do to production?


As you well know, ractopamine is not permitted into the EU, it is permitted in the United States. Many producers feed, what wecall paylene, ractopamine is the same. We're in a position, Christine, to control what we feed. As you know, feeding 20 millionhogs, we can change the feeding rations very quickly, and most producers only feed ractopamine in the final 30 days of theraising process. So it's very easy to go off of paylene. And the conversations we have had with the Chinese trading company isthat we would only supply them paylene-free product. That we're in a position to do. I think we're in a unique position fromthat standpoint that we can do that. We can affect that, and in fact, I have already made some changes in our productionoperations starting ten days ago. I already started affecting some of those changes ten days ago to make sure we were in aposition to do that. I think -- do I think there's a trade issue going on here with the Chinese government? Probably. Certainlythey're reacting to all of the attacks from the U.S.

But I do believe, at least in my conversations, and I've had a number of them, I do believe they take the ractopamine issueseriously. In spite of the fact that what Taiwan says they're going to do. I think they take it very seriously, it is a political issue inthat country. They could be using it as part of a trade war, but I believe it's an issue they're not going to back up on. I do notbelieve that they're going to reverse their position unless they find themselves in extremely dire state. I think they are going toenforce that. They are enforcing it, and in fact, a number of our plants have been d-listed. We do have plants that are not onthe d-list group at this point. We are actively working to reverse that situation. We'll see if we make progress there or not. But,I don't think the Chinese government is going to relinquish on that issue. At least not in the near term. There's no indicationfrom my conversations that they're going to at all. Anybody that's going to supply China is going to have to have paylene-freeproduct. I think that's a given.


All right. Well it sounds like you'll work around that then. Thanks.

Operator

Your next question comes from the line of Timothy Ramey from D.A. Davidson. Please go ahead.

Timothy Ramey - D.A. Davidson - Analyst

Good morning. Congratulations.








Timothy, it must be early in the morning.


It sure is. I understand that Wal-Mart is testing a new thin film case-ready product in Alabama, I think. You guys had kind ofstepped back from the case-ready market a ways back. Do you have any thoughts on that? Is there any new opportunities forcase-ready?


Tim, maybe you got some bad information. You are right, they are retesting a different film in Alabama and we are the supplier.


Ah?


We're the ones supplying them. We are the [fourth] supplier for the Brundage Alabama DC that is testing this new film. I'm notat liberty -- I think I'm very comfortable I know who the beef supplier is. We're not the beef supplier but we are the pork supplier.In fact, I was at Wal-Mart 48 hours ago on this exact issue. I think we are being very supportive of them and we are one of -- theonly packer who said we could make the changes. We made the changes in our operation and did that.

Now, with that being said, we have some concerns about that packaging, and we have expressed those concerns to them veryclearly. I think it's controversial. I think they understand, I was with, [Penn Cole], who is their senior vice president, again, justthis week. And they are evaluating that. I think Wal-Mart wants to see their fresh meat business grow. We are supportive ofhelping them grow their fresh meat business. We're a partner with them. We're very actively involved in this thing. So, maybethat's -- we haven't stepped back from case-ready. Not at all. In fact, I think you might get a different story the call -- get on theWal-Mart call.


What are your concerns about the packaging? If you might.


The product is safe. This issue what they call tri-gas. And what you and I -- it's had a small part -- very small portion of this gashas carbon monoxide, it's 0.4% of the gas is carbon monoxide. That's controversial with consumers. It's safe, there's no risk toit, and so it dissipates, but I think it has public perception problems with it, but I don't think there's any food safety issue thereat all. So we've just talked to them about some alternatives that we believe we can deliver to them the same solution they want,which is overwrap. They want to be in the overwrap, similar to what I call the guy next door, they want to compare their productexactly to the guy next door. I think we can do that without that type of -- without that gas being added, and we've explainedthat to them. They're evaluating that. I think they're evaluating it very serious as a result of our session there this week.








And as other retailers get wind of that, are they interested in that package or have you seen any stepped up?


There were some retailers like Target have gone that direction. Other retailers like Albertson's or it's really Super Value now,Super Value and Kroger -- Super Value and Safeway have back away from it. They've actually gone the opposite direction. Soyou've got retailers going two different directions. Target's going one -- Super Target's going one direction and Super Valueand Safeway have announced that they are withdrawing the packaging from their retail stores and they are not going to sell itin that format. So I'm telling you it is controversial. I think -- I don't think there's any risk from a food safety standpoint, and theUSDA has ruled on that, and there's no issue there, but it's one of those things that it's politically sensitive in the marketplace.We're trying to be sensitive to that to Wal-Mart.


Got it. Thank you.


You're welcome.

Operator

Your next question comes from the line of Eric Katzman from Deutsche Bank. Please go ahead.

Eric Katzman - Deutsche Bank - Analyst

Good morning, everybody.


Good morning.


I just want to follow up on Christine's questioning regarding China, and actually how that relates to the difficulty in the freshmarket. Larry, you seem fairly optimistic as to what this could mean for Smithfield on the export side. But, do you see it kind ofhaving, let's say, like a second derivative impact on the fresh market and other players not being able to be so irrational in thatpart of the business?


Certainly don't know what you mean by other players being irrational. You might want to expound on that comment.








But, I mean, haven't you seen like new capacity brought on in the fresh market when at a time when maybe the market didn'tneed it?


Yes.


That's what I mean by irrational.


I guess I would think -- I would hope no one would be stupid enough to build a new pork plant because China's got a diseaseproblem. That would be clearly irrational. But, I've had this debate with a number of people, that this is an opportunity thatprobably has a window attached to it. I don't -- I mean, near term it looks near term. I think it's longer than at least it's beingportrayed in the press. I think it's going to be longer than that. I doubt it could last a year or two years. But, fundamentally theChinese people -- Chinese government want's to feed the Chinese people, so they will work to solve this problem and get theseherds back in line and help solve this disease problem, although it is [Blue E] or PERS, and PERS is an issue that doesn't easilygo away, you just have to manage around it. And PERS is a continuing disease in this country we have every day in our hogfarms. We just have to manage around it.

So, I don't think that anybody should be, and I have a phrase here, is what I call hooked on heroin. I don't think anybody shouldget hooked on this heroin of these exports. I think that's a tragically dangerous strategy to say that you're going build yourbusiness based on exports. Those are nice opportunities when they come along, but God knows you shouldn't build plants andyou shouldn't build capacity to respond to near-term export opportunities or else you're just building yourself for a total disasterhere, and we've seen it again and again and again whether you are in Canada or whether shipping in Brazil and you're shippingto Russia and those markets are on again/off again. They look good when they're there but my gosh they can disappear overnightand would be catastrophic, so I hope the industry does not respond to this in terms of capacity growth.


Okay. As a follow-up, perhaps you could comment on where is the strategy in beef and the plant and given what, [JVL] comingout of nowhere and buying that Swift asset. Maybe you can just kind of comment on that then I'll pass it on?


We announced in the last conference call that we were given the Brazilian buyer and we're not being the successful buyer thatwe had to evaluate where we were going on the beef side of the business here. We have not made a final decision there. At thispoint, we have not made the decision to move forward. We do have the land. We do have all of the appropriate things in placethat we could begin construction on the new beef plant very quickly here. The economics on the beef side of the business arenot that strong. Admittedly, our numbers are up from last year but there's still, I mean, the beef business is still not a goodbusiness. And we're not, at this point, we're not moving forward on that plant. We have not abandoned it. I want to be clearwith that.







We have not abandoned the strategy, but we have not moved forward, and we are contemplating where we're going to gofrom here. And I promised you guys that we would make the decision in 90 days from the June date. I'm not sure I'll make thatdate, but I want to you know it is very much on our mind, and we don't want to make a mistake here by going forward and wedon't want to make a mistake. I think we look forward to five years. I think there needs to be a new beef plant. We've got thecattle to supply that. The other side of that is the cost of construction here. It's gone up dramatically in terms of that plant. Manyof you know about construction costs in this country and how much they've risen. It's given us pause to slow down and thinkthis thing through more seriously. So we are going through the serious evaluation right now. So at this point, we're not goinganywhere. That's not a good answer for you, but that's the only answer I got.


That's helpful. I'll pass it on. Thank you.

Operator

Your next question comes from the line of Pablo Zuanic from JPMorgan. Please go ahead.

Pablo Zuanic - JPMorgan - Analyst

Good morning, everyone.


Good morning, Pablo.


Another question for you, Larry, or for Joe, would you say that hog futures right now reflect that potential demand from China?And then on the point of (inaudible) last a year or two, where would you see hog prices going, if effectively having problemswith [20%] of their production?


Joe, you want to take that one?

Joe Luter - Smithfield Foods - Chairman

Yes, do I think the hog futures do reflect the possibility of the future Chinese business. I think, yes, to some degree. We don'tknow if those export sales to China will materialize. If they do materialize it could very easily be 4% of the U.S. production, andif that's the case, I think it would be very, very bullish on hog futures beyond where the price levels are today. If you just lookwhat a 4% decrease in supply does to hog prices it's rather significant. If you have an increase of 4% of the hogs leaving thecountry, it's the same thing as a reduction of supply and it could have a very positive impact. But yet that's not done today, butthe possibility remains now.








Can you quantify that (inaudible) $5 in (inaudible)?


I think if you go back and look in the last hundred years when production goes up or down 4%, I think 5, $6 would be the numberif historical patterns hold true.


Just another question about the quarter, Larry. When I look at the hog production cost, how much of that $49 was circo virus?Without circo virus, what would the raising costs have been? And if you can comment on what your actual corn costs was forthe quarter.?


Pablo, I don't want to go to that level of detail except I'll tell you, I think in previous quarters, previous quarters, Pablo, we havesaid that we've had these -- this circo virus costs had been something like $1 to $1.25 a hundred weight, is where we've been.The thing that you should take away from that, it has negatively impacted us, it is reversing. In July, the number of hogs thatwe produced on our farms was more than the comparable period last year. So we have passed the low point in that, in fact,we're coming back from the other side of that. I didn't even ask our people to even calculate it for this quarter, but I would -- soI'm just giving you a prior number. If you sort of use a $1 a hundred weight, I think for the quarter you wouldn't be too far off.


Could you just remind us of the math, the one little change in the cost of corn, what was the impact of raising costs?


I think what I told you before, $0.30 a bushel equals a $0.01 a pound.


But don't forget soybeans.


That's right.


Sure, sure. One more question then I'll pass it on. The [instincts] gain on the corporate action side, $70 million, we haven't seenthat before. It's mostly domestic, right? But, I mean, I guess we should include in there your (inaudible) and Romanian operations,how (inaudible) gain happen, and how should we think of that going forward?








Jerry, you want to take that?


Yes. Pablo it was an item related to our funding structure in Romania. We felt, giving the size, that it was important to discloseit as an item. That being said, I want to -- I think it's important to point out that, given previously elected position on mark tomarket, we do not disclose that position. But, there is an offsetting mark to market loss one time for the quarter that wouldmore than offset this gain.


All right. Thank you.

Operator

Your next question comes from the line of Kenneth Zaslow from BMO Capital Markets. Please go ahead.

Kenneth Zaslow - BMO Capital Markets - Analyst

Good morning, everyone.


Good morning.


Last quarter you guys said that processed meats contributed almost all of the $60 million in profitability in the pork business.This quarter overall profitability in pork only increased about 8 or so million dollars. Can you discuss the contribution from theprocessed meat? And has processed meat contribution become more consistent?


I'll say that it has, and I will tell you as I made my comments that our fresh meat was also actually worse year-over-year. The $8million that you see in the increase in pork, more than that came from processed meats. Where we -- had we not had animprovement in processed meats our pork numbers would have been worse. So they are consistent and the other part I wouldsay to you is they are better than they have been. They're continuing to improve, just not maintain. They're continuing toimprove.

One of the things we always struggle with is, we do calculate the numbers separating the fresh pork from the processed meats.We've been very careful to not create any misstatements, periodically we change the price at which we transfer product fromone section from the fresh meat of the business to the processed meat side, which can impact the way in which the profitabilityshows on our reports. So, I would leave it as that our processed meats are delivering -- is delivering all of this. The same as I saidto you in the last quarter.








Just to continue on that point, I'm not going to ask any more after this. What would be the volatility around the processed meatbusiness going forward? Or can we assume that somewhere between a 30 to $60 million incremental profit is going to becoming out on a quarterly basis? How does that change, looking out farther than just a quarter or two though?


Clearly, processed meats are not as volatile as fresh meat, which can change in 24 hours and 48 hours. I think that -- I'm notgoing to assure that this is all -- that we're not going to have any declines on our are processed meats side of the business. Thosethings can happen. High priced raw materials can change that over time, but I do think that you're going to see a very solidcontribution from that part of the business for the, certainly, foreseeable future.


I appreciate it. Thanks.


You're welcome.

Operator

Your next question comes from Edgar Roesch from Banc of America Securities. Please go ahead.

Edgar Roesch - Banc of America Securities - Analyst

Good morning.


Good morning.


Was pretty impressed with the level of SG&A spending. It seemed like you got some real efficiencies there. And, certainly as apercentage of sales it's near one of the lowest levels you've ever reported. Obviously there's some inflation from higher priceson your sales line, but could you just talk about, is it efficiencies from some of these acquisitions that's driving, what seems tobe a very efficient rate of spending there?


Edgar, this is Carey. I think two points worth noting. One is the $17 million FX gain that we mentioned flows through that. Thatis an SG&A item so you have that flowing through there. And you also have a fact that we're no longer including the expensesfrom Jean Caby, which we had in the first quarter of fiscal '07. So you do have those events, basically, working towards reducingthat SG&A number.








Now on the other side. Let me speak to the acquisition part. I think -- and the fact that we've got Bo Manly working for us as ourExecutive VP and Bo was previously the President of PreMium Standard Farms, Bo was responsible for integrating the PremiumStandard Farms business into our business. And we did a, I think, Bo, and he was in charge of that, I think he and the team dida terrific job of integrating that operation. We have essentially dismantled much of the operation of PSF and have eliminateda great deal of the G&A costs associated with that acquisition by putting that into our -- into both the Smithfield and Farmlandorganizations. I think that hit the bottom line, I'm going to use the word instantly. The other side of that is that on the far recordsbusiness that we bought last October, we've done a very good job of running that for the Morrell banner and using some ofour existing people. So I think there's been a big effort on that front. So those two have gone into the organization withoutnearly the complement of SG&A that you would normally expect.


That's terrific. Since you mentioned Armour-Eckrich, any chance you'd mention the utilization rates that you're starting to runat in this plant?


Well, many of those plants we're changing as we speak. I think I had told you before that we were at about 80% utilization. Iwas striving to get to 90%. I can't tell that you number in these last three months has changed terribly, and in fact we're intosome of the weaker periods of the year. I think as we go into the fall season, those numbers will move up. I think everythingthere is positive, let me say that. You've got some seasonality that's running but we're still at about 80% utilization.


Thanks very much.

Operator

Your next question comes from the line of Bill Chappell from SunTrust. Please go ahead.

Shazed Ali - Suntrust - Analyst

Good morning, guys, this is actually [Shazed Ali] in for Bill Chappell. I noticed that both the international and the other segmentsare doing very well. I wanted to give you a chance to kind of expand upon both of those, let us know kind of how GroupeSmithfield is doing, as well as the Butterball JV going into turkey season seeing as corn has come done a little bit regarding raisecosts in that [segment]?


I think the numbers speak for themselves. We bought the Butterball business. I had someone tell me here recently, when I wasout, that they were bothered by the fact that -- I'll touch on the second, that, Larry, you guys bought that Armour-EckrichButterball business and that was going to be a tough one to wrestle to the ground. And I'm sure that's hurting you guys. I sortof chuckled as I walked way saying, I wish, I mean, it was one of the better acquisitions we've engineered. The Butterball business,combined with our Carolina Turkey business has gone together extremely nicely. And the numbers show, in fact, the other line,[Gary], I think is essentially the turkey business. I think there's another company who released earnings this morning indicating







their turkey business was off about 20%. I think if you look at ours, you'll see our turkey business is up very nicely, so we're doingextremely well on the turkey side of the business.

On the international front, Groupe Smithfield side, we were losing money, with the Jean Caby business, we were losing moneylast year at this time, and losing significant money, in the order of $1 million a month on a pretax basis. Now we're makingmoney even at half is better than the $1 million a month. So it's hat kind of a turn around. It was a marriage made in heaventhere. Where we were very strong on the manufacturing side and Sara Lee was very strong on the marketing side. We've takenboth of those to help both businesses, and that horse has come out of the gate running hard. That continues to performextremely well. I think you guys made the comment some nearly 8 or 9 months ago that international wasn't delivering anything,I told you, although it is coming, we have, the only fly in the ointment here is Romania. And Romania was moving forward, andwe've got this setback that just hit us here in the last 30 days, which is a disappointment and a setback, but we'll deal with it.That's what we do every day. That's a business we understand, so judge us on our numbers.

Shazed Ali - Suntrust - Analyst

Sounds good. Thanks, a lot, and congrats on a great quarter.


Thank you.

Operator

Your next question comes from the line of Oliver Wood from Stifel Nicolaus. Please go ahead.

Oliver Wood - Stifel Nicolaus - Analyst

Thanks a lot for taking my question. This is a question for Carey, actually, just trying to reconcile the comments in the releaseand also in the prepared comments that, cattle feeding operations generated loses versus the breakout of equity, [and incomeof] affiliates which indicated the $5 million gain. Just trying to figure out what the delta is there?


Yes. The gain that you see and the table we provided is for the joint venture that we have with Conti, it's the Five Rivers Ranchcow feeding operation. Separate and apart from that, our beef group does own and raise some of its own cattle. So I think thepoint that you're alluding to, that Larry made mention, in terms of some of the losses, in terms of beef feeding, may have comefrom the Company home inventory as opposed to the inventory of the joint venture.


I'll speak to that for just a moment. Those seem inconsistent. These are completely different feeding programs. We're feedingfeed lots, which is primarily made of cattle, which have a very quick turn, so you're buying the feeder cattle feeding them outa few months and then putting them in the market. While we have the Five Rivers joint venture with Conti, what we are doingis feeding holsteins which take 15 months and you buy very young cow. And you have to hold them for more than a year upto 13, 14 months.







So what happened to us on our own raising side is we bought cattle a year ago when feeder cattle holsteins were expensiveand corn was low. Then now what we're doing is feeding expensive feeder cattle, expensive corn, and that ends up being adisaster in the short term. But that's all reversing. Now holstein feeder cattle are selling sharply lower than they were a year agoand we're going into lower corn which would lower cattle, so this thing -- that's why I made the comment earlier, it will bereversing, and it should be, this whole thing, given time, it all reverses itself. That's why the two were inconsistent, they had todo one to three month time lag and the other one's 12 month time lag.


Operator, we've got time for one more question, please.

Operator

Okay. That question comes from the line of Ann Gurkin from Davenport. Please go ahead.

Ann Gurkin - Davenport - Analyst

Good morning.


Good morning, Ann.


Couple questions on the international business in terms of processing hogs per day. I think the target was 14,000 by November,but given the swine fever outbreak, can we get an update?


Ann, I will tell you that, in Romania, the plant, as a result of this, has been closed for two weeks and we just opened the planthere this week. The government allowed us to reopen the plant. That was because they blocked out all the farms and we couldn'tmove hogs off anybody, even the farms that had no problem were being locked out. I think we're looking at a situation goingforward where we're going to be able to put in 10,000 or so or 12,000. Near term this is not going to have quite the impact. Wewere ramping up to 14,000 and 16,000. We're running 9,500 this week and we're running 10,000 next week. So the plant is backup and running and we're selling the meat again. I think what will happen is you might even see weeks where we'll have 14,000.We just won't have the weeks of going to the 18 and 20,000 that we thought we were going to. We've probably got a setbackhere of a full one year, in terms of the growth of the numbers coming to the plant.


Okay. Great. And then, looking back to the U.S., can we get an update on retail pricing? Are you getting through with customers?And is the timing of pricing in line with your estimates or is there any kind of lag?








I think that the fact that -- I will tell you on the fresh meats side it's been tough. The fresh meat results demonstrate that on theprocess meat side I think we've done a very good job.


Great. Thanks very much.


You're welcome.


Our time is up. We want to thank everyone for joining us today. Have a great day.

Operator

Ladies and gentlemen, that does conclude our conference for today. Thank you for using the AT&T Executive TeleconferenceService. You may now disconnect.

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smithfield food first quarter earnings transcript 2008

Economy & Finance