Operator: Ladies and gentlemen, thank you for standing by. Welcome to the Smithfield Foods Fiscal 2013 Third Quarter Earnings Conference Call. At this time all participants are in a listen-only mode. Later we'll conduct a question-and-answer session with instructions being given at that time. As a reminder, today's conference is being recorded.
I would now like to turn the conference over to your host Ms. Keira Lombardo. Please go ahead.
Keira L. Lombardo - VP, IR: Good morning. Welcome to the Smithfield Foods conference call for the third quarter fiscal 2013. We would like to caution you that in today's call, there may be forward-looking statements within the meaning of federal securities laws. In light of the risks and uncertainties involved, we encourage you to read the forward-looking information section of the Company's 10-K for fiscal year 2012. You can access the 10-K and our press release on our website at smithfieldfoods.com. In addition, non-GAAP amounts maybe discussed on today's call. A non-GAAP reconciliation is available on our website in the Investor section.
On our call today are Larry Pope, President and CEO and Bo Manly, CFO. This is Keira Lombardo, Vice President of IR. Larry will begin our call with a review of our operating results, then Bo will review our financial results. Larry?
C. Larry Pope - President and CEO: Thank you, Keira. Good morning, everyone. We are pleased to report solid results for the third quarter of fiscal 2013 with earnings up $0.58 per share. Our performance in the third quarter underscores success we are continuing to see in Packaged Meats as we continue to execute our plan to transform Smithfield into a more value-added consumer Packaged Meats company. This transformation is providing us with increasingly high quality and more consistent earnings. Fiscal 2013 third quarter earnings were driven by both top and bottom line growth in Packaged Meats and solid contributions from our international operations. This helped to offset lower year-over-year Fresh Pork earnings and losses in our hog production business.
Headlining the quarter is the progress we continue to make in growing our Packaged Meats business. Packaged Meats operating profit increased $8.5 million or 7% year-over-year and volume was up over 5%. Our core brands grew more than 6%.
Year-to-date, profitability in our Packaged Meats business is up over $62 million or 21%. Margins have increased to $0.17 per pound from $0.14 per pound last year. At the same time, volume grew by 4% with broad based gains across the number of key product categories or brands in all key trade channels. In addition, volumes have improved on a year-over-year basis for four consecutive quarters.
In the third quarter we achieved volume both in 9 of our 12 core brands with our Smithfield, Eckrich, Farmland, and Margherita brands up double digits. Packaged Meats sales dollars and volume grew across all the trade channels.
By category, Packaged Meats growth was fuelled by bacon. Our Smithfield bacon, Eckrich dinner sausage and Armour dry sausage all achieved double-digit growth. We achieved market share gains in the bacon, dinner sausage, dry sausage and ham steak categories. We were also very successful in broadening distribution of our core brands in a number of key product categories. These categories include bacon, dinner sausage, deli meats, dry sausage and ham steaks.
2012 was a successful holiday ham season for the Company with 6% higher volume year-over-year driven in part by our new Smithfield Pecan Praline and Caramel Apple Spiral Hams. Eckrich Bacon Lovers Deli Meats also delivered another impressive quarter fueling gains in the deli channel.
We continue to invest in our brands putting more and more muscle behind our marketing, advertising and promotions. We are expanding our partnership with Richard Petty Motorsports to include primary sponsorship of the legendary 43 Ford in 25 events during the 2013 NASCAR Sprint Cup Series season.
Our Eckrich, Farmland, Gwaltney, and Smithfield brands will also participate as primary sponsors throughout the year to engage fans and customers with unique marketing initiatives that introduced them to our brands and products.
Furthering our growth in Packaged Meats, we recently announced that we signed a letter of intent to form a joint venture with Kansas City Sausage Company, which will provide a growth platform in premium breakfast sausage and dinner sausage. These two categories represent over $4 billion in retail and foodservice sales annually. This is a big opportunity for Smithfield to grow in two categories that have not historically been a focus for the Company and move raw material up the value chain from commodity lifestyles to branded packaged meats.
In January, we opened our new state-of-the-art hot dog plant in Kinston, North Carolina, which will increase our hot dog capacity. We believe this plant will deliver superior product at substantially lower cost and give us a leadership position in the hot dog category. The product is cooked in the package, providing the most food-safe hot dog on the market. The manufacturing process is highly automated allowing for greater speed and less labor.
In summary, the third quarter was marked by continued progress in executing our strategy to grow our Packaged Meats business with broad-based gains in market share and distribution. Looking forward, we anticipate that our Packaged Meats business will continue to deliver consistent growth with increased market share and broader distribution of our core brands. We expect margins at the high end of the normalized range with at least 2% to 3% volume growth in fiscal 2013 and for this trend to continue into fiscal 2014.
Our Fresh Pork business was solidly profitable in the third quarter but sales and margins were treated from last year's levels due to a lower cut out that was not fully offset by lower hog prices.
Fresh Pork sales declined 4% and operating profit fell 31% to $7 per head from $11 per head last year, but it was still at the high end of the normalized range. Year-to-date, Fresh Pork operating margins were $6 per head.
As a reminder, last year's third quarter included large shipments of Chinese carcass that bolstered Fresh Pork earnings. We did not have that business this year. That being said, export demand across the number of markets was greater than the year ago and substantially offset the absence of Chinese carcass this year. Excluding the carcass volume last year, exports were actually up 19% year-over-year.
In Fresh Pork, we continue to focus on improving our product mix towards differentiated branded and value-added products both domestically and in the export markets. Our integrated platform is providing meaningful opportunities in this area. For example, we recently secured new value-added retail business directly attributable to our integrated platform that should boost Fresh Pork margins beginning in the fourth quarter.
Last month following announcements that China and Russia will require third party certification that pork exports are ractopamine-free we announced that our Clinton and Tar Heel, North Carolina plants are 100% ractopamine-free. Combined these two East Coast plants supply the market with more than 43,000 ractopamine-free hogs per day. As the largest hog producer in the world, Smithfield is uniquely positioned to deliver differentiated products to meet specific customer needs both domestically and abroad. This is a key point of difference and a unique selling proposition for our products and brands.
Although the situation with China is fluid, we are pleased to report that progress is being made. Our business model gives us a competitive advantage and allows us to supply the largest pork market in the world with ractopamine-free product. We expect to resume shipments again as early as next week.
Russia is more complicated and will require a face-to-face meeting between government officials. We are hopeful a resolution can be reached within the next 30 days, but this issue is much bigger than pork trade. While an important market, export sales to Russia represent only about 1% of U.S. pork production.
Also on the export front, higher cost and more stringent regulation should yield lower EU pork production and EU exports in calendar 2013. EU Commission is forecasting EU pork production down 3% year-over-year to the lowest levels since 2009 and EU pork exports down 15% from 2012. The U.S. and Smithfield in particular is well positioned to fill this void.
Overall, lower per capita protein supplies and higher prices for competing protein should help push pork retail prices higher in calendar 2013. While this is a positive trend, customers are facing higher taxes and energy cost, which could adversely impact domestic demand. That being said, pork at retailers' price quite competitively compared to other proteins, particularly beef, and should provide retailers with excellent feature opportunities in the spring and summer.
Taking all of this into account, we think that Fresh Pork margins will continue to be in the normalized range, up $3 to $7 in the fourth quarter as well as into fiscal 2014.
Our hog production segment reported an operating loss of $64.5 million compared with a loss of $6.6 million in last year's third quarter. Margins suffered from higher raising cost and lower hog prices. Live hog market prices averaged $60 per hundredweight in the third quarter, 2% below a year ago. At the same time, raising cost averaged $68 per hundredweight in the third quarter, up 7% from the prior year. Although we lost money in hog production, we were able to mitigate losses with our risk management strategy to deliver results that were better than industry averages. Based on the ISU model, industry losses in November, December, and January averaged approximately $68 per head, nearly double our per head loss of $15 in the third quarter.
As we move into the fourth quarter in the summer, hog prices should lose seasonally higher from current levels. Corn prices have declined somewhat since the highs that were reached during last summer, but remained at elevated levels. Despite our risk management strategy that should dampen the effects of high price grain for the balance of the fiscal year, we still expect losses per head in the mid-single-digit range in hog production in fiscal 2013.
While it is difficult to forecast hog production results for fiscal 2014 at this point, we are actively working to mitigate commodity risk in that section. We anticipate improved margins year-over-year.
Our International operations delivered a solid third quarter with profits totaling $44 million. These profits were generated largely on the live production side of the business, specifically in Poland and Romania.
In addition, the meat processing business in Poland, Romania, and Mexico were all profitable as well. Year-to-date International operating profit totaled $100.4 million. Given positive hog production fundamentals in Eastern Europe and the improvement in our international meat processing operations, we are confident that our International segment can continue to deliver operating profit at the high end of the normalized range in fiscal 2013 and '14.
In summary, the third quarter was solid. We are excited about the growth prospects for this company as we continue to transform into a more value-added consumer packaged meats company. We expect solid earnings in fiscal 2013 and look forward to even stronger results next year.
That concludes my comments about the quarter, but before I turn the call over to Bo I would like to take a few minutes to discuss with you our plan to grow our business to create value for our shareholders. We believe that as we execute this plan we will dramatically improve our earnings stream and migrate Smithfield further towards a consumer packaged meats company. We expect to execute this plan over the next several years that consists of two parts; one internal and one external. The internal portion of the plan will maximize our existing base of business, while the external component will target branded and value-added acquisitions. Let me share some of the details with you. The internal plan has been underway for several years and we have made significant progress in improving our base business as well as our balance sheet. With that said, it is time for us to concentrate even more heavily on growing our base business. The fundamental tenant of the internal plan includes the following; first, increased capital investment to upgrade our facilities with new machinery and equipment to improve our competitive cost structure and achieve least cost best-in-class operations. This will mean $300 million to $350 million annual CapEx going forward to fund this investment in our business. Next, continued higher investment in direct to consumer marketing programs to build brand equity and grow sales. We will achieve this with double digit increases in consumer marketing spending every year. Currently, consumer marketing represents about 1% of Packaged Meats sales. Third, establish a culture of innovation to build a strong product pipeline to drive Packaged Meats' volumes and margins. Our innovation will be focused in five strategic areas; packaging, health and wellness, convenience, taste, and pork consumer solutions. These platforms have a strong focus on product differentiation, highlighting quality and convenience better for your food, including lower sodium, lean protein, natural ingredients, and new taste experiences.
Last, emphasize our hog production assets as a strategic point of difference; in other words, (brand) our farms. We believe that our vertically integrated platform has a competitive advantage for our Company as it allows us to meet customer specifications. Both domestic and export customers are asking for differentiated products, from group housing to ractopamine-free, and Smithfield is uniquely positioned to fill this demand.
While these investments will allow us to grow Packaged Meats by 2% to 3% every year and over the next several years, expand our normal operating margins into the high single-digits and beyond. We believe that these are very attainable goals.
The external plan consists of a disciplined and opportunistic approach to acquire branded and value-added companies. The Kansas City Sausage joint venture is an example of this approach. Here we will invest in modest-sized acquisitions in the $50 million to $200 million range that can be easily integrated into our existing business. We will use cash generated from our existing business and our strong balance sheet to finance these acquisitions, while maintaining the sound fiscal policies put in place over the past several years.
We are excited to share this growth plan with you and believe it will dramatically improve our earnings stream and migrate Smithfield further towards a consumer packaged meats company. We hope that we have provided you with a better sense of growth potential and plan for the future.
With that, I'll turn it over to Bo.
Robert W. Manly, IV - EVP and CFO: Thank you, Larry. Good morning, everyone. Net earnings for the third quarter of fiscal 2013 totaled $82 million or $0.58 per share compared to $79 million or $0.49 a share a year ago. Net earnings for the nine months totaled $154 million or $1.03 per share compared to net earnings of $282 million or $1.72 per share a year ago.
Quarterly earnings were positively impacted by a lower than expected effective tax rate. Our effective tax rate in the third quarter was 15%, making our year-to-date ETR 23%. The majority of the lower rate benefit is attributable to increasing profits from our international operations, which are taxed at lower marginal rates.
In addition, we benefited from tax law changes enacted in early January as part of the American Taxpayer Relief Act, which retroactively reinstated tax credits for research and development, welfare-to-work and other programs. These credits contributed to lowering the quarterly effective rate by approximately 5% or $0.04 per diluted share. As a consequence of an improved international earnings outlook, we now expect our full year tax rate to be in the mid-20% range.
Last year's third quarter EPS was $0.49; included $0.18 per share for Campofrio charges, as well as a $0.02 charge for the early extinguishment of debt. Excluding these charges, adjusted EPS was $0.69 on a non-GAAP basis.
Dollar sales for the third quarter totaled $3.6 billion compared to $3.5 billion last year, a 3% increase. Volume was up in all segments, most notably our core brands and Packaged Meats, sufficient to offset across the board lower average unit prices. For the nine months, dollar sales were $10 billion, a slight increase from last year.
Selling, general and administrative expenses in the third quarter were 5.6 % of sales compared to 5.4% last year. Year-to-date, selling, general and administrative expenses were 6.1% of sales compared to 6.3% last year. Higher (indiscernible) and pension expenses increased SG&A costs for the quarter and year-to-date.
Interest expense for the quarter was $41 million, down 4% compared to Q3 last year. Year-to-date interest expense was $125 million, down from $135 million last year due to lower interest rates. We continue to expect interest expense to be approximately $170 million for the full fiscal 2013.
The diluted weighted average number of shares of outstanding for the third quarter and nine months were 141.5 million and 149.0 million shares, respectively. We repurchased 8.2 million shares of common stock during the third quarter for $174 million. This includes 7 million shares from COPCO. We have repurchased more than 17% of the Company's shares since July of 2011. We have $25 million remaining in our current authorization and at quarter end we had 138.7 million shares outstanding.
Depreciation and amortization for the quarter was 58 million compared to 60 million last year. For the nine months depreciation and amortization was 176 million compared to 182 million a year ago. We expect depreciation and amortization to be approximately 240 million in fiscal 2013.
Including cash at $139 million, net debt at the end of the quarter was $2.2 billion. Net debt to adjusted trailing 12 month EBITDA was 2.7 times. Net debt to capitalization was 41%. Liquidity was $1.2 billion, well above the upper end of our liquidity target range of $500 million to $1 billion.
Capital expenditures for the quarter totaled $67 million compared to $60 million last year. For the nine months capital expenditures totaled $195 million compared to $199 million a year ago. We expect capital expenditures this year to be approximately $300 million. As we invest in future growth, we anticipate capital expenditures could rise above the $300 million level.
In January, we partially executed the accordion feature of our revolving credit agreement and increased our short-term borrowing capacity by $100 million to a total of $1.3 billion. In February, we also entered into a new $200 million (internal) loan. The backdrop of these actions is the upcoming May and June debt maturities totaling $455 million. These two new financings provide capital at a significantly lower rate along with cash on hand to retire these maturities.
At this time, I'll turn the call over to Larry Pope. Thank you very much for your time and attention.
C. Larry Pope - President and CEO: Folks, earlier on the call I misspoke regarding the ISU model. Based on the ISU model, industry losses in November, December and January averaged approximately $28 per head. Apparently, I said $68 per head. I know the losses are tough in this industry, but I don't think we're losing $68. So, I just want to correct that error and for those of you taking notes.
With that, Keira, we'll turn it over to the operator for questions.
Keira L. Lombardo - VP, IR: Thanks, Larry and Bo. Operator, please open the lines for questions. In order to provide the opportunity to as many analysts as possible to ask questions, we request that you only ask one question. If you have another question, please get back in the queue. Operator?
Operator: Christine McCracken, Cleveland Research.
Christine McCracken - Cleveland Research Company: Larry, we've seen this rather rapid drop-off here in hog prices in the last few weeks, and I am wondering, are we getting close to the bottom? Is this a seasonal kind of sell-off in hog prices, and is it a supply problem or is it a demand issue?
C. Larry Pope - President and CEO: I think Christine from my standpoint; I think it's a demand issue. You've seen some of the literature out there what some of the retailers are talking about, and I would tell you that Bo and I are speaking to you remotely this morning. We're actually in Orlando, Florida at the Wal-Mart supplier meeting; their big – there what they call their Beginning of Year Meeting. So we're actually here for – with meetings with Wal-Mart, and you saw some of the information around their sales and we are hearing some sluggish sales out there on the retail side. As well this disruption going on, on the export markets has pushed this product back into the domestic market. And when the cut-outs were dropped off, the Fresh Pork results dropped off, and (though) they've recovered back and was done as pushback on live hog prices pretty dramatically. And so, the live hog market, as you know, has fallen pretty precipitously, and I think we're at a low point. I think we are. And these export markets, I think are going to recover. At least some of the China's; looks like it might be getting result; Russia is not. The other piece that I think it is having a bit of an impact is the situation in Japan with the Yen. And so, I think, it is demand issue more so than supply issue.
Christine McCracken - Cleveland Research Company: Just from the perspective of the China issue is that so – does it make sense for you guys to pull the hogs of Paylean if in fact those issues are resolved?
C. Larry Pope - President and CEO: No, I don't think so. I think that's the resolution is going to occur, Christine, it is quite the opposite. But I think they are pretty forceful in their position that they want ractopamine-free product. I don't think that's going to change. What I was meaning in my or intending in my comments is that we are in a position to ship that product to them. I don't think they have any plans to lift their requirement for ractopamine-free. They've only worked out some protocols that appears are in the final stages of development protocols that you can get certification such that we can actually deliver it.
Operator: Kenneth Goldman, JPMorgan.
Kenneth Goldman - JPMorgan: You've been open at times in the past about your hedges and I realize you may not want to provide specifics right now. But can you fill us in a bit on what Mr. Thamodaran and his team are maybe seeing these days in terms of the direction of feed. I realize it is way too early to call given the weather. But just curious how he and you guys may or may not disagree with the futures curve here filling out there right now?
Robert W. Manly, IV - EVP and CFO: Ken, it is difficult at this point to be a prognosticator of corn prices going forward. We continue, however, to have modest positions in our grain that we've signaled to the marketplace before. We are actively looking for any opportunities to lock-in margins at positive levels into next year. We have read, I think, same news that everybody else has. The corn could be anywhere from the $4 range to the $8 range depending upon what happens with weather. So, we are watching the various storms as they come across the U.S., but we will plant record acres and if we have decent corn crop we could have lower corn going forward. At the same time, we have some protection in place in case it goes the other direction. So, we're playing the market at this point along with everybody else, but we do have protection in place that we feel very comfortable with. So, I think, the disastrous scenario is that if anybody wants to paint them, I don't think we fall into that category today.
C. Larry Pope - President and CEO: I would tell you, Ken, I think the whole world got snake bit last year by sitting in the spring thinking that we were going to have a great corn crop and I think corn was going to drop into the (450) range. I think that last as late as late May and into June and then I think it stopped raining for the next four months. So, from our standpoint, we've told you a number of times that if we really don't have a view, we're going to be about 50% hedged on our grains and so we're not going to let it – we're not going to get the benefit of a terrific grain market and we're going to get killed by a bad grain market. We're trying to manage this business for the process and Packaged Meats side of the business. So, as Bo said, we've got a fairly sizeable grain hedge, at prices we are very comfortable with and we are trying to look to the hog market to see when we can lock-in margins.
Robert W. Manly, IV - EVP and CFO: We're anticipating decrease as we look out into next year in our raising cost because of anticipated lower grain markets.
C. Larry Pope - President and CEO: That's right, Ken. We think – more than think. We're very comfortable that our raising costs are going down next fiscal year. Isn't that right, Bo?
Robert W. Manly, IV - EVP and CFO: That's correct.
Operator: Farha Aslam, Stephens.
Farha Aslam - Stephens: I was looking at your long-term plan and what was notable to me is that you've decided to keep the hog production group rather than doing something more radical like splitting it off, possibly spinning it off, as some companies have broken up their businesses. How much value and kind of what time horizon do you think that branding the hog production group will take? And looking at earnings, do you still think $10 to $15 ahead is an appropriate level for us to think normalized earnings, actually because that business has pretty much lost money three of the last five years and is probably going to lose money in 2013 as well as in 2014?
C. Larry Pope - President and CEO: Let me deal with the first part of that question. I will let Bo deal with the second part of that question. I thought there would be a question related to spinning off the hog farms and I missed it. I said it would be the first question. I was wrong. It didn't quite make the first question. Maybe you didn't get in queue fast enough.
Farha Aslam - Stephens: That's what it is.
C. Larry Pope - President and CEO: I think I discussed in last quarter our commitment to this vertically integrated model, and from where I sit – and again, I am sitting at Orlando, Florida this morning, I believe that the investments we've made over these past 25 years are now really coming off time. I think we made a decision back in – I guess that was 2007, that we were going to move away from crate gestation into group housing. We were well ahead of this industry. If you see the wall of force coming against the retailers and foodservice groups to go that direction, we were six years in front of that. I think we're in front of that as well in terms of our differentiation and traceability, and Bo Manly was very much on the front-end of that decision some over 20 years ago. I think we are now finding ourselves in the uniquely positive position with respect to these farms. It is the major reason that we have discussions and increase our relationship with our big customers, that's what they want to talk about. And so we are now in a position to do what others find impossible to do, hard to do or can only do on a very small scale. The most prominent example of that is the opportunity that we have now to ship into China the largest market in the world where others find that very difficult to do, we can adjust very easily and do it. And so, I see the results as much as anyone else and we focus on them. I can tell you the other side of that business that Fresh Pork business going forward. I made reference to the fact that we've got some Fresh Pork business coming on in third quarter and fourth quarter directly attributable to our vertically integrated model. This thing is really paying dividends to us. So, I think, it would be a big mistake to sell the farm off at this point, just as the whole world and the market is coming to us. Bo, you want to address your issue about losses?
Robert W. Manly, IV - EVP and CFO: Yes, I think, we have put a range out there of $10 to $15 per head. That obviously has been a very difficult milestone to achieve over the past three years. I think that as we looked forward into next year, we believe we are going to be positive in terms of our hog production results probably we will flag and be slightly below our normalized range but we believe that with moderation in corn prices that we think will be there compared to this year that we should be able to operate in a positive fashion. I don't think we can expect at this point in time to reach the upper levels of the normalized range that wouldn't be very prudent at this point in time. But I can say for – we are respectful of our equity investors, we have looked at this issue from a financial perspective and operating perspective very carefully and extensively over many, many months. And as Larry points out, the timing is now in terms of our ability to cash in on this investment. That involves in the hog operation for long time. We've had efforts of lean generation in times gone by. That probably was ahead of itself to some degree, but I think the time is now in terms of both what Larry talked about on export markets and domestically, traceability issues, with people having concerns about what ingredients are in their meat or actually what protein is in their meat, is causing issues. So, I think both from an emerging perspective as you look at where the trends are going, you'll see is the whole food effect with antibiotics and everything else. These are things that are finally coming to the forefront in the consumers' mind and I think we're uniquely positioned to be able to take advantage of that vertical integration.
C. Larry Pope - President and CEO: I think the one thing Bo – and Bo is now responsible, I think those of you on the call know the addition to Bo's responsibilities as CFO; Bo has an EVP title and the President of Murphy-Brown. So Bo wears a lot of hats and does an extremely good job and has been involved in this now for many, many, many years. And I think that we've got such a model that is so unique and so positive that I have never been disencouraged and I'll take the criticism for the short-term losses that we've got. This hog model will not survive in this format. Something will happen. Producers in the hog business are not there as a lifestyle or for fun and a hobby. They are in it for the money. Hence we all know that industry will adjust faster than the other industries. And so this whole economic model will correct and I believe that there'll be a time when we'll be having a discussion on this call about the fact that we're getting good returns on the hog farms, (pour us) good returns on the meat processing side. Just hang on, guys.
Operator: Heather Jones, BB&T Capital Markets.
Heather Jones - BB&T Capital Markets: I was wondering if you could give us a sense of – you talked about your increased (map) spend; that's going to probably approximate about $8 million to $10 million headwind going forward, is just increased innovation? And if we look over the last few years, you made a lot of progress in improving the Packaged Meats business and it (vent) much more stability to your earning stream. And I was wondering if internally at the Board level, is there some timeline that they've given that they want to see a reward from that in the sense of improvement in valuation, because if you look at like your price-to-book valuation or other valuation metrics, that hasn't yet translated into an improved valuation? And in fact, in the last few years, your price-to-book valuation range has narrowed relative to where it was, say, 10 years ago. So I was wondering if the Board has put out or given you guys just – there is this timeline of where they want to see the improved earnings stability translate to improved valuation.
C. Larry Pope - President and CEO: Maybe I – I mean I think I understood your question pretty clearly, but the fact for what our standpoint, I think I started a few years ago with a discussion of – I think I've quoted many times on this call, I want my $0.10 and that $0.10 has become $0.12, become $0.14, but – I think this quarter it was $0.15 and this year-to-date were at $0.17. I think our Board, if anything, is encouraging us to push even faster and farther. We still have some upward room in terms of our margin as I said in my comments. We're looking to improve our margins up to the – I guess, now we're about 7% and we think we go to 7% to 8%. For this quarter we were 7% and year-to-date we are 8% and we are looking at 9% and maybe 10%. Those are the benefits of this. Over time as these map spending bring their benefits and I will tell you from where I see it as CEO they are coming faster than most companies see those kinds of growth. I think (indiscernible), Bo, you can have your comments. But look I think our Board is extremely pleased and so are most of our shareholders on this side of the business.
Robert W. Manly, IV - EVP and CFO: We had our Board meetings two weeks ago – two days ago rather and there was a lot of information passed to them about our MAP spending, very encouraging. And frankly their attitude is our MAP spending is more of a momentum builder rather than a headwind. So, we look that there is tremendous opportunity and trying to drill it down to cover everything from our NASCAR activities all the way to new product development.
Heather Jones - BB&T Capital Markets: I think my question is more related to Farha's question. My point being your increased MAP spending, innovation et cetera has resulted in improved margins and it has resulted in improved earnings stability of the entire company, but it hasn't translated to an improved valuation for the stock. And so my question is there a timeline internally as to when this need to translate to an improved stock valuation because you are right it has result in improved margins?
C. Larry Pope - President and CEO: Your comment and my frustration is that I think we continue to deliver – we just delivered our fourth straight quarter of this, and I realize four quarters don't make horse race, but this is year after year after year. Now, we've gone from what used to be $0.04 a pound to now $0.15 a pound and averaging $0.17 with volume growth, with brand growth and none of our 12 core brands in all of our channels and increasing distribution and yet the market says, you're still a low-multiple stocked. I would suggest to you that we think we're putting the numbers up on the board, but it's not translating into the stock price and so that's why we Smith the last year and a half buying 17% of the stock back in. So I think this is a better company than this. We know the momentum. As Bo said, the momentum is so powerful there, okay, we'll buy the stock back. I mean this is – and we feel your frustration, your concern, and yet we think we're doing a good job with the numbers, but somehow our investors simply don't see the merit multiplying that.
Operator: (Peter Fleiss, Highfield Capital).
Peter Fleiss - Highfield Capital: Couple of things. I just wanted to fill some parts of Farha's question and had this question in two questions that we have – we obviously agree with you at the end of the day that we think the stock is cheap, that's why we own it. I think the frustration a lot of people have is that you're looking at the business area right and there's tremendous volatility on the production side. And the usual investors who get involved in Packaged Meats are (still not) comfortable taking on that type of volatility. So I guess to Heather's point, first of all, while I applaud your actions by emphasizing brand and spending more to developed branded, there has to be some sort of timeline, right, because you are putting up the results; we see it, and again buying back 70% of the Company, I think that at these levels we applaud and also think is smart. But at some point you need to say, alright, here's what we're doing with our strategy, we have this many years and if it doesn't work, then maybe we need to reassess I would think, because if not, like at the end of the day, the stock is where it is, right, you can't get on, on every quarter and say it's cheap and no one cares until they care, right. So, the real question is how much longer are you going to give yourself, right, because Larry, you've been CEO for seven years now. The question is like, how many more years do we have of sort of believing that we have to hold on for the hog production ride and one day it'll all sort of get paid off?
C. Larry Pope - President and CEO: Peter, I feel that question and feel that same – probably that frustration equal to or more than you do. I do think that the – I think that most investors underappreciate the value of our farms to this business and the closer you are to the business the more you would understand that, and I think it's a very powerful competitive advantage. I still believe that and I understand the loss is on the farms. I think we are going through a cycle. There was a period there for a number of years when the hog farms were extremely profitable and carried the meat processing business – I'll admit that with the rise – with the sharp rise in grain prices which changed the cost model; the revenue side of the business has not caught up with that. And the capacity in the industry has not adjusted back to that cost. We have made some of that. I mean corn used to be $2.50, and I guess that's sort of the number; maybe $3 a bush was considered a high price corn market. We now consider $5 a cheap corn market. So this whole cost structure has moved up to deal with a 60% increase in corn; absorb that. Now we got to absorb another 25%, and I am suggesting to you, with EU numbers going backwards like they're going and the losses in this industry and the demands on the export market, this thing is beginning to accrue it right back, and I understand your saying how long do you have to wait. And I said before, I'll take the criticism for these farms. That's my job, as the CEO is to take the criticism, so I am not passing it on to anyone else. However, I think that I have something here, and if for those who are patient investors, I think you got to be very pleased with that. And in the meantime, I guess, we will just have to have this debate.
Peter Fleiss - Highfield Capital: We've been on and off investors for quite some time and I think at some point though I think you just need to internally come to conclusion that there is some sort of timeline, right because at the end of the day like your business today, the enterprise value today is not that different than what it was sort of when you were blowing up in '09 ironically, right and yet your Packaged Meats business is obviously in a far, far better place. So, you have valuations like Hillshire and other Packaged Meat assets trading at high teens earnings multiples when your combined business is it like 10 times earnings when you are losing money in high production. At some point in time the disconnect, I hear you – I guess my point is that some point in time you need to sort of set a boundary for yourself, I believe, because otherwise the market everyday people can buy and sell the stock like you can't control that. The fact is that disconnect just gets bigger and bigger over time.
C. Larry Pope - President and CEO: Peter, I'll take that question. Let me think about that, you have a valid comment. Not bothered by your comment at all, we've had some of the exact same conversations, let me react to that.
Peter Fleiss - Highfield Capital: And again I mean it in sort of (just intention) we own a bunch of stock because I think it is cheap and it is under appreciated and hopefully – and we applaud that you are buying back 17% of the stock. And I think over time that value will get realized. I just think there needs to be a mindset which is that you think about sort of how long do we have to do this for?
C. Larry Pope - President and CEO: I will take that seriously. Thank you, Peter.
Operator: Ryan Oksenhendler, Bank of America-Merrill Lynch.
Ryan Oksenhendler - Bank of America-Merrill Lynch: I guess, I will ask, I mean, I don't know the question is on unbelievably at a point, but in terms of, Larry, you talked about the power of having the vertical integration. Are you guys getting paid higher price for having group housing. I think you said last caller you weren't ractopamine-free is there enough demand for ractopamine-free products. I think China just buys mainly hams and shrimp for the other products to justify the capital that you are spending on, differentiating yourself?
C. Larry Pope - President and CEO: Let me tell you that the short answer of that is I now have – I can now tell you that, yes, with some customers we are getting paid more for ractopamine-free and group housing. So I'm not going to tell you that we're getting enough on that side to offset the losses on live production. That's obvious from the numbers. We're not getting enough to offset that. But we're at the front end of this thing. So the answer is, yes. The discussions are continuing to go with customers. This is the single biggest topic of discussion. It's group housing in the United States, it's ractopamine-free outside of the United States. So, that's part of our marketing plan and I made my comments about branding these farms, it's real value that's just now showing up and I'm not going to disclose any particular customer arrangements, except to say that the short answer is, yes.
Ryan Oksenhendler - Bank of America-Merrill Lynch: Then just a quick follow-up. On the fresh pork side, I'm hearing that retail feature is picking up and I guess it seems a bit more attractive – pork seems a little bit more attractive now relative to chicken, because those prices have gone up a little bit. So is that going to benefit the balance of the year or do you think that Russia and China overhang may weigh on prices?
C. Larry Pope - President and CEO: Well, I do think that when you got beef sort of selling at $5 a pound and pork selling at around $3.50, maybe a bit less and chicken at $2. There is a huge, huge price value proposition in favor of pork. And so, I know that there's going to be more feature activity. That's not me guessing; that's me knowing, that there's going to be more pork activities we get into the spring and the summer. I know some things there. And so, I think that part is going to be fine. In fact, I think it's going to be very good. When you talk about the overhand from Russia's; Russia, I don't like, but it's not a giant market for the industry. China, I think for us is getting resolved, and the industry will make some adjustments to react to that, to try to access that market in some way. They can get some hogs and segregate and they can deal with it. So, I think the China thing, which is a huge business for everybody in this industry; I think that's all going to – that's all new positive. That's on the positive side, and I think going to get resolved in a fair way. So, I think China today is a huge issue, but I think it's getting resolved relatively quickly, and I think we'll return back on the export side. I do. With that being said, I think 2012, exports will probably be down for the industry because we're already through January and February into March, so we're going to lose some of this January, February, March period. As we get deeper into that, deeper into the year, I think the export markets or the EU market is going to be down significantly. I think the rest of the second half of the year could be just fine on the export side.
Operator: Diane Geissler, CLSA.
Diane Geissler - CLSA: I had a question – actually its two questions; one is a detailed question, the other is sort of the strategic link between the hog production group and your increased spending in the Packaged Meats side. So, can you just tell me how many hogs you're raising annually currently? And then, to your comment Larry about increasing your CapEx to be more efficient in the new four point strategic plan you talked about this morning. This is just echoing comments on how do you get paid for hog production. Is the incremental CapEx going to be ongoing for the next three to five years, could you talk a little bit more about that and I am expecting that the increase in CapEx is also to sort of monetize the benefit you have from the hog production group. But if you could provide more detail on sort of how are you going to capture that premium from those hog assets that that would be – I'd love to hear more about that?
Robert W. Manly, IV - EVP and CFO: Diane, you asked a little bit earlier about volume. We raised approximately 16 million pigs per year and put that into context, we are slaughtering about 28 plus depending upon industry volumes. We have significant capital expenditure program that Larry had described earlier, in excess of $300 million. That would include monies both for monetization and efficiency purposes at the plant level, at our processing level similar investments to what we've done in the hot dog area to try to make ourselves best in class, category by category. Another example of that would be our investment in the Kansas City, sausage operation which will move us into new product categories as well. Again that's an example of how we are trying to meld our livestock operations in with the Packaged Meats operations. That goes back to commodity sales that we are selling to third parties and the industry will now be able to internalize a great deal of those and find ways to add value in the sausage area through the vertical integration of our (indiscernible) operations. With significant expenditures moving forward in terms of our group housing initiatives. We were 38% complete this year moving over 50% of our – at the end of this year in terms of the (indiscernible) conversion. It takes a little bit longer time for the pigs to start moving through the system from that. But that's another tie-in to our various marketing programs as the adaptation that we're doing on the housing side. I think that there's really opportunities to further bring various components of our livestock business into the marketing arena, whether that's the greatest feed ingredients, certainly the traceability issues are paramount in the minds of people in the export market since they are trying to struggle through the horse meat issue as well. I think that there is areas in terms of medication. Medication use, I think, will be another one that will add value in terms of traceability story. So, I think there are many, many areas that we're trying to look at the various attributes of the livestock side of business and how can those play to various consumer concerns and issues moving forward and recognizing that the world is changing. Whole foods in that market is the largest growing segment within the retail industry and many people maybe not trying to get to the whole foods levels but trying to position themselves with positive attributes in the minds of the consumers.
C. Larry Pope - President and CEO: I'll just react. One of the comments that Bo didn't touch on, but he knows is on his project. We had a plan to move raising cost down on a competitive basis, down $0.02 a pound or $5 a head. I think I can confidently say this morning that Bo and the Murphy-Brown team have accomplished that goal and right behind that they have set another goal to get another $0.02 a pound and $5 a head. He's chocking a little bit as I've just said that. But the fact is we're going to continue to get as we go through making these changes on the farms to group housing. Bo and the team are improving the efficiencies of these farms as they do it. As Bo made reference to, we are also on the plant side we've got some plant operations that have got some nice opportunities to lower our cost, in the ham categories and bacon categories, that we're applying capital that are going to continue to give us those same kinds of economic benefits which are substantial over the bacon category and the ham categories. So that's why I feel confident on these margins in the Packaged Meats side; by employing this capital we can continue to move our margins up. There's still plenty of room for us to improve our margins. We just need to put the CapEx behind it to make it happen.
Diane Geissler - CLSA: So, how long would you expect to be…?
C. Larry Pope - President and CEO: You know, I don't know that we have looked so far more than about 24 months out that this is – these next two years I think are fairly critical, particularly on the meat processing side, and we won't quite be there on the live production side for probably three more years.
Robert W. Manly, IV - EVP and CFO: We've got till 2017 before we'll finish the…
C. Larry Pope - President and CEO: The group housing.
Robert W. Manly, IV - EVP and CFO: The group housing initiative.
C. Larry Pope - President and CEO: So, it's a little bit farther lag on the group housing side. I think on the meat processing side it'll be faster; two years, maybe 30 months.
Operator: Tim Tiberio, Miller Tabak.
Tim Tiberio - Miller Tabak: My question is on Campofrio. With equity income nicely positive, is there any thinking around the timeline of increasing your involvement there? Should we just assume that this kind of remains steady-state as you develop your strategy within Europe?
C. Larry Pope - President and CEO: That's a very good question. Obviously, we've been a significant shareholder. This has been a discussion a number of times and came up even recently at an analyst conference that our people were involved in here just a couple of weeks ago, because Campofrio was presenting at the same conference. We continue to evaluate our position there. We're very comfortable with our 37%. I think that you saw through their discussions that Campofrio is in the middle of a restructuring plan to improve their operations pretty sizably and I totally endorse and support what they are doing. In fact, we've been pushing for that some time now. It is not easy to do restructuring in Europe and it takes significantly longer to do that than it does in the United States. I don't need to tell you that Europe is in the middle of a lot of change from what's going on France to I'd like to say that (indiscernible) in Italy. There is a lot of uncertainty in terms of when Europe is going to turn. But I will tell you that Campofrio is a good company. I like their brands. I like the way they go to market. I like the margins on their product. I like the positioning of their brands. I so I think there is a future between Smithfield and Campofrio. We have sort of an option at any time to move forward on that acquisition. I think that the timing is not right, but I think that we keep an eye on that all the time and ones we see that this restructuring is working and Europe is turning towards the positive in a way that's definable as opposed to guessing then I think we will look more positively on moving forward. At this point, I have no plans to exit our investment with Campofrio.
Tim Tiberio - Miller Tabak: And just lastly on the packaged food side. Obviously, volumes are trending higher than your guidance. Was there something promotional in the quarter that was driving that or is it possible that trend line could continue even into the fourth quarter?
C. Larry Pope - President and CEO: Just to answer the question, just the beginning of your question one more time?
Tim Tiberio - Miller Tabak: Just looking at your packaged volume growth of 5% versus the full year guidance of, I believe, 2% to 3%, was there anything in the quarter that was kind of elevating that above the trend line guidance or is it profitable or within the realm of possibilities that does extend into the fourth quarter?
C. Larry Pope - President and CEO: Of course, it does. Of course, it is. We're trying to give ourselves a little bit of wriggle room here. Our Packaged Meats business is out – it is my phrase, so I realize I am a CEO, so realize it's the CEO language. Our Packaged Meats business is on fire. We are extremely pleased with what's going on there. And the fact that we are increasing our sponsorship on the racing program is another example of how we're tying our marketing programs, and we're not racing just because we like NASCAR. I do like NASCAR personally. I do like Richard Petty personally. But what I really like is what NASCAR does for me with our Packaged Meats and how our operating companies are able to leverage that write through promotional programs with our retailers. Yeah, our package – and George Richter and our organization, our marketing team (did) bang-up job in putting these marketing campaigns into real programs that produce real dollars today as well as above the brand equity. So, I think – I know that 2% to 3% looks a lot smaller than the 4% to 5% that you see. So, maybe we got a little bit of wriggle room in those numbers. We might surprise you on the upside.
Operator: Ann Gurkin, Davenport.
Ann Gurkin - Davenport: Just want to follow back on your comments regarding Japan and how should we think about the weakening currency and demand for product – importer product such as Japan as the calendar year unfolds?
C. Larry Pope - President and CEO: Japan is obviously one of the most important markets on the export side. And Japan has got the change in the yen there certainly having a real impact at how that plays through the gate pricing. I am not as optimistic about the Japanese side getting resolved. It's not a political issue going on; that's a pure economic issue going. And so, we are seeing – the whole industry is seeing some fall-off in their Japanese sales, and that one Ann, I am probably – if I had to look at the export markets and say, what am I most concerned about, it would probably be Japan and how they resolve that. They love the product, and so they've just got to get used to a higher price and that's going to take a little bit of adjusting on the Japanese side.
Ann Gurkin - Davenport: And then, touching base on your external strategy, can you comment at all on what the pipeline looks like for potential acquisitions…?
C. Larry Pope - President and CEO: Oh, sure. I guess you'd like for me to – would you like for me to give you the names and the prices and…?
Ann Gurkin - Davenport: Sure, (indiscernible), that'd be great.
C. Larry Pope - President and CEO: And then (both of what we) pay and how we pay for them?
Ann Gurkin - Davenport: Yeah, that'd be perfect.
C. Larry Pope - President and CEO: Ann, we are actively looking. I think that there are some opportunities out there that we think could be really instrumental in moving this thought forward, and all I would tell you to do is stay tuned. How about that?
Ann Gurkin - Davenport: Stay tuned to the next year or so, fair?
C. Larry Pope - President and CEO: Excuse me?
Ann Gurkin - Davenport: Stay tuned to the next year or sooner?
C. Larry Pope - President and CEO: We'll see.
Ann Gurkin - Davenport: Fair enough. Thank you very much.
Operator: Robert Moskow, Credit Suisse.
Rachel Nabatian - Credit Suisse: It's (Rachel Nabatian) in for Rob. Would you say that at this point the packing industry has made enough reductions in capacity to adjust for the near-term export weakness? And also, would this help fresh pork margins going forward?
C. Larry Pope - President and CEO: I don't know if there has been any capacity adjustment. Are you talking about the beef plant that Cargill closed or something I don't know – Bo, do you know…?
Rachel Nabatian - Credit Suisse: I guess, you are holding on…
Robert W. Manly, IV - EVP and CFO: We will slaughter everything that's raised in United States, as a matter of at what price it clears the market. So, there hadn't been any fall-off and change in slaughter rates. Frankly, if anything you say that the export markets, that shortfall is being reflected in the decrease in live animal prices that we're seeing in the current time. So, I don't think – and I think from a perspective that we have adequate capacity to handle all pigs raising today.
C. Larry Pope - President and CEO: I don't see any capacity shuttering…
Robert W. Manly, IV - EVP and CFO: No, absolutely not.
Operator: Akshay Jagdale, KeyBanc Capital Markets.
Akshay Jagdale - KeyBanc Capital Markets: I wanted to pick your brain a little bit on the value-added Packaged Meats side. So, obviously, you've had great results and sustainable great results. So, I'm assuming you are gaining share in aggregate in your categories. So, correct me if I'm wrong there, but if you are gaining share who are you generally gaining share from, is it like private label, is it branded, is it vertically? I'm assuming you are one of the only vertically integrated player, so it's got to be non-vertically integrated players that you are gaining share from. Then in your opinion what's biggest sort of sustainable strategic advantage that you have there, especially as it relates to the branded competitors? So, we always see Oscar Mayer as one of the most priced assets there. They've talked about some increased competition from Tyson. Tyson is also following similar strategy like you on the value-added side. So I'm just trying to understand in your sort of thought process, how is that whole competitive dynamic going to play out?
C. Larry Pope - President and CEO: Well, I guess, I'm not going to get on the call and talk about our competition and what (that) specific names, except to say that there's IRI Nielsen data out there that you probably subscribe to which you can do the math yourself, and it certainly is different depending on the categories that we talked about. The one advantage that we have is that many of our processing plants are directly attached to our slaughter plants. So we can get the best of our raw materials into our processed meats and Packaged Meats business. We don't have the transportation cost associated with that. So we've got that benefit that those who don't have slaughter operations, they don't have raising operations behind them, have a different type of raw material. But finally, we've simply taken a focus that we're going to manufacture these Packaged Meats. We got a competitive cost structure, we're getting in more competitive cost structure and we think that that brings to us a big advantage. So, I think it really is that sort of – that sample. So I think the whole industry is moving towards the guy who's got the raw material, is in a better position, the guy who is buying the raw material.
Akshay Jagdale - KeyBanc Capital Markets: So in other words, your cost structure is better generally. It's getting better, it seems like it's better than your competitors, and that is translating into lower prices to the consumer generally. And now, you're adding to that with marketing, so your brand spending is going to get to eventually to levels that are comparable to some other stronger brands. Is that how we should think about it?
C. Larry Pope - President and CEO: That's a complicated answer.
Robert W. Manly, IV - EVP and CFO: That's a complicated question.
C. Larry Pope - President and CEO: And we ought to deal with that one. Maybe you and Bo want to talk about that a little more at length offline.
Akshay Jagdale - KeyBanc Capital Markets: Okay, great. I'll pass it on. Thank you.
Keira L. Lombardo - VP, IR: We're going to end the Q&A here and turn it over to Larry for a few final remarks.
C. Larry Pope - President and CEO: Well, thank you for listening this morning. And certainly, we have a little bit more complicated report with our tax rate changes and such. However, I just want to make one final comment; that we believe our Packaged Meats business is in really good shape. We think we're managing our live production side favorably and I think our results this quarter compared to the industry are sort of demonstrative of that fact. I think Fresh Pork is going to get better as we go through the year. In fact, it has got better even the last few weeks. Many of those who follow the industry know that. So, we're looking forward to a bright future. We think we're looking internally. We got a lot of opportunity internally. We've identified – George Richter and the group have a lot on their plate and I'm very confident they can get it done. There's some opportunities to bolt on some things onto this business. Kansas City Sausage is a great example of taking lifestyles; going into a category we weren't in and branding Packaged Meats. It's taking raw material from what Bo does on the live side, putting it all the way through with the brand on it, dramatically changing the margin structure. So I think the future is bright and hang on and hopefully we'll have some good things to report. Thank you very much and have a good day.
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