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Smithfield Foods (NYSE:SFD)

Q3 2013 Earnings Call

March 07, 2013 9:00 am ET

Executives

Keira L. Lombardo - Vice President of Investor Relations and Corporate Communications

C. Larry Pope - Chief Executive Officer, President, Executive Director and Member of Executive Committee

Robert W. Manly - Chief Financial Officer and Executive Vice President

Analysts

Christine McCracken - Cleveland Research Company

Kenneth Goldman - JP Morgan Chase & Co, Research Division

Farha Aslam - Stephens Inc., Research Division

Heather L. Jones - BB&T Capital Markets, Research Division

Peter Fleiss

Ryan Oksenhendler - BofA Merrill Lynch, Research Division

Diane Geissler - Credit Agricole Securities (NYSE:USA) Inc., Research Division

Tim J. Tiberio - Miller Tabak + Co., LLC, Research Division

Ann H. Gurkin - Davenport & Company, LLC, Research Division

Rachel Nabatian

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Smithfield Foods Fiscal 2013 Third Quarter Earnings Conference Call. [Operator Instructions] And 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

Good morning. Welcome to the Smithfield Foods conference call for the third quarter of 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 may be discussed on today's call. A non-GAAP reconciliation is available on our website in the Investors 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

Thank you, Keira. Good morning, everyone. We are pleased to report solid results for the third quarter of fiscal 2013 with earnings of $0.58 per share. Our performance in the third quarter underscores the 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 a number of key product categories, core brands and all key trade channels. In addition, volumes have improved on a year-over-year basis for 4 consecutive quarters. In the third quarter, we achieved volume growth 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 trade channels.

By category, packaged meats growth was fueled 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 are 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 all participate as primary sponsors throughout the year to engage fans and customers with unique marketing initiatives that introduce 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 2 categories represent over $4 billion in retail and foodservice sales annually. This is a big opportunity for Smithfield to grow in 2 categories that have not historically been a focus for the company and move raw material up the value chain from commodity live sows 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 retreated from last year's levels due to a lower cutout 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 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 carcasses that bolstered fresh pork earnings. We did not have that business this year. That being said, export demand across a number of markets was greater than a year ago and substantially offset the absence of Chinese carcasses this year. Excluding the carcasses 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 a 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 2 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 level 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 retail is priced 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 of $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 to the loss of $6.6 million in last year's third quarter. Margins suffered from higher raising cost and lower hog prices, while 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 (sic) [$28] per head, nearly double our per-head loss of $15 in the third quarter.

As we move into the fourth quarter and summer, hog prices should move seasonally higher from current levels. Corn prices have declined somewhat since the highs that were reached during last summer but remain at elevated levels. Despite our risk management strategy, that should dampen the effects of high-priced 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. It consists of 2 parts, 1 internal and 1 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 under way 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 tenets of the internal plan include 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 investments 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 5 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-you food, including lower sodium, lean protein, natural ingredients and new taste experiences. And 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 is 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-size 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 will turn it over to Bo.

Robert W. Manly

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 9 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 EPR 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 9 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 MAP and pension expenses increased SG&A cost for the quarter and the 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 outstanding for the third quarter and 9 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 COFCO. We have repurchased more than 17% of the company's shares since July of 2011. We have $25 million remaining on 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 9 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 of $139 million, net debt at the end of the quarter was $2.2 billion. Net debt to adjusted trailing 12-month EBITDA was 2.7x. 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 9 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 term loan. The backdrop of these actions is the upcoming May and June debt maturities totaling $455 million. These 2 new financings provide capital at a significantly lower rate, along with cash on hand, to retire these maturities.

At this time, I will turn the call over to Larry Pope. Thank you very much for your time and attention.

C. Larry Pope

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. The losses are tough in this industry, but I don't think we're losing $68. So I just want to correct that error for those of you taking notes.

With that, Keira, we'll turn it over to the operator for questions.

Keira L. Lombardo

Thanks, Larry and Bo. Operator, please open the line for questions. [Operator Instructions] Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question will come from the line of Christine McCracken of 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'm 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

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 Walmart supplier meeting, what they call their beginning-of-year meeting, so we're actually here with meetings with Walmart. 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. When the cutout sort of dropped off, the fresh pork results dropped off, and now they have recovered back. And what it's done is pushed back on live hog prices pretty dramatically, and so the live hog market, as you know, has fallen precipitously. And I think we are at a low point. I think we are. And these export markets, I think, are going to recover. At least some of the China looks like it might be getting resolved. Russia's not. The other piece that I think having a bit of an impact is the situation in Japan with the yen. And so I think it's a demand issue more so than a supply issue.

Christine McCracken - Cleveland Research Company

All right. And then just from the perspective of the China issue, is that still -- does it make sense for you to pull those hogs off Paylean if, in fact, those issues are resolved?

C. Larry Pope

I don't think so. I don't think that's the resolution that's going to occur, Christine. It's quite the opposite. I think they're 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 with my comments is that we're 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, it appears. They're in the final stages of developing the protocols that you can get certificate -- certification such that we can actually deliver it.

Operator

And we'll go next to the line of Ken Goldman at JPMorgan.

Kenneth Goldman - JP Morgan Chase & Co, Research Division

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's way too early to call given the weather, but just curious how he and you guys may or may not disagree with what the futures curves are showing out there right now.

Robert W. Manly

Ken, it's difficult at this point to be a prognosticator of corn prices going forward. We continue, however, to have modest positions on our grain that we've signaled to the marketplace before. We are actively looking for any opportunities to lock in margins at positive levels in the next year. We have read, I think, the same news that everybody else has, that 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 a 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. And so I think the disaster scenarios that, if anybody wants to paint them, I don't think we fall into that category today.

C. Larry Pope

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 that corn was going drop into the $4.50 range. And I think that lasted as late as late May and into June, and then I think it stopped raining for the next 4 months. And 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 get the benefit of a terrific grain market, and we're not going to be killed by a bad grain market. We're trying to manage this business for the processed and packaged meats side of the business. And so we've got, as Bo said, we've got a fairly sizable grain hedge at prices we're very comfortable with, and we're trying to look to the hog market to see when we can lock in margin.

Robert W. Manly

Yes, and we're anticipating a decrease as we look out into next year in our raising cost because of anticipated lower grain market.

C. Larry Pope

That's right, Ken. We think -- we more than think, we're very comfortable that our raising costs are going down next fiscal year. Is that not right, Bo?

Robert W. Manly

That's correct.

Operator

Our next question comes from the line of Farha Aslam at Stephens.

Farha Aslam - Stephens Inc., Research Division

I'm just 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 a head is an appropriate level for us to think normalized earnings? Just because that business has pretty much lost money in 3 of the last 5 years, and it's probably going to lose money in 2013 as well as in 2014.

C. Larry Pope

Farha, 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 Inc., Research Division

That's what it is.

C. Larry Pope

I think I discussed in last quarter our commitment to this vertically integrated model, and from where I sit, and, again, I'm sitting in Orlando, Florida this morning, I believe that the investments we've made over this past 25 years are now really coming upon. 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 6 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 a 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're 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 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 -- my goodness, I see the results as much as anyone else sees them, 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 farms off at this point just as the whole world and the market is coming to us. Bo, do you want to address her issue about losses?

Robert W. Manly

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 3 years. I think that as we look forward into next year, we believe we're going to be positive in terms of our hog production results. Probably, we'll 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. I've been involved in the hog operation for a 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 talks about in 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 trends are going, the whole food effect with antibiotics and everything else, these are things that are finally coming to the forefront in the consumer's mind. I think we're uniquely positioned to be able to take advantage of that with vertical integration.

C. Larry Pope

I think the one thing -- Bo's now responsible -- I think those of you on the call know that in addition to Bo's responsibilities as the 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 this encouraged, 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're in it for the money, and as 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 will 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 plus good returns on the meat processing side. Just hang on, guys.

Operator

We'll go next to the line of Heather Jones of BB&T Capital Markets.

Heather L. Jones - BB&T Capital Markets, Research Division

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 a $8 million to $10 million headwind going forward. Is this increased innovation? And if we look over the last few years, you've made a lot of progress in improving the packaged meats business, and it has lent a lot of -- much more stability to your earnings stream. 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 an 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

I mean, I think I understood your question pretty clearly, but the fact -- from 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. I think this quarter, it was $0.15, and this year-to-date, we're at $0.17. I think our board, if anything, is encouraging us to push even faster and farther. We still have some room, upward room in terms of our margin, as I said in my comments. We're looking to improve our margins up to -- I guess now we're about 7%, and we think we can go 7% to 8%. For this quarter, we were 7%, and year-to-date, we're 8%. We're looking at 9% and maybe 10%. Those are the benefits of this over time as these MAP spendings bring their benefits. And I'll tell you from where I sit as CEO, they're coming faster than most companies see those kinds of growth. I think if I -- Bo, you can add your comments. I think our board is extremely pleased and so are most of our shareholders on this side of the business.

Robert W. Manly

We had our board meeting 2 weeks ago -- or 2 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 at it as tremendous opportunity and trying to drill it down to cover everything from our NASCAR activities all the way to new product development.

Heather L. Jones - BB&T Capital Markets, Research Division

I think my question's more related to Farha's question, but my point being your increased MAP spending, innovation, et cetera, has resulted in improved margins and 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're right, it has resulted in improved margins.

C. Larry Pope

Heather, from where I sit, I echo your -- or your comments. My frustration is I think we continue to deliver. We just delivered our fourth straight quarter of this, and I realize 4 quarters don't make a 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 in 9 of our 12 core brands in all of our channels and increasing distribution, and yet the market says, "You're still a low-multiple stock." 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 spent the last 1.5 years buying 17% of the stock back in, saying this is a better company than this. And 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 and 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

Our next question will come from the line of Peter Fleiss with Highfields Capital.

Peter Fleiss

A couple of things. I just want to distill some parts of Farha's question and Heather's question into questions that I -- 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 look at the business today, right, and there's tremendous volatility on the production side. And the usual investors who get involved in packaged meats just aren't 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 develop brand, there has to be some sort of timeline, right, because you are putting up the results. We see it. And again, buying back 17% of the company, I think, at these levels, we applaud and also think it's smart. But at some point, you need to say, "All right, 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 it's not like -- at the end of the day, the stock is where it is, right? You can't get 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 7 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 we'll all sort of get paid off?

C. Larry Pope

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 that it's a very powerful competitive advantage. I still believe -- and I understand the losses 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 bushel 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'm suggesting to you, with the 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 equilibrate 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'm not passing it on to anyone else. However, I think that I have something here, and for those who are patient investors, I think you're going to be very pleased with that. And in the meantime, I guess we'll just have to have this debate.

Peter Fleiss

I hear you. 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 a conclusion that there's 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're 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, it's like 10x earnings when you're losing money in the hog production. I mean, at some point in time, the disconnect -- I hear you. I guess my point is at some point in time, you need to sort of set a boundary for yourself, I believe, because otherwise, the market -- every day, people can buy and sell the stock, like, you can't control that. The fact is the disconnect just gets bigger and bigger over time.

C. Larry Pope

Peter, I'll tell you what, I'll take that question. Let me think about that. It's a valid -- you have a valid comment. I'm not bothered by your comment at all. We've had some of the exact same conversations. Let me react to that, okay?

Peter Fleiss

And again, I mean it in sort of best intention. We own a bunch of your stock because I think it's cheap, and it's underappreciated, and hopefully -- and we applaud that you're 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

I hear you. I'll take that seriously. Thank you, Peter.

Operator

We'll go next to the line of Ryan Oksenhendler from Bank of America.

Ryan Oksenhendler - BofA Merrill Lynch, Research Division

I guess I'll ask -- I mean, I know the questions -- I don't want to belabor the point. But in terms of -- and Larry, you talked about the power of having the vertical integration, but are you guys getting paid a higher price for having the group housing? And I think you said last call that you weren't. And on ractopamine-free, can you -- is there enough demand for ractopamine-free products? I think China just buys mainly hams and trim. For the other products, to justify the capital that you're spending on differentiating yourself?

C. Larry Pope

Let me tell you that the short answer to 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. And 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. And 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. And 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 - BofA Merrill Lynch, Research Division

Okay. And just quick follow-up. I mean, on the fresh pork side, I keep hearing that retail feature is picking up, and I guess it seems a bit more attractive -- pork seems a little 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 the Russia and China overhang may weigh on prices?

C. Larry Pope

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's 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 activity as we get into the spring and the summer. I know some things there. And so I think that part is going to be fine, and in fact, I think it's going to be very good. When you talk about the overhang 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. 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 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 2013 exports will probably be down for the industry because we're already through January and February and into March, so we're going to lose some of this January, February, March period. But as we get deeper into the year, I think the export markets for 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

We'll go next to the line of Diane Geissler with CLSA.

Diane Geissler - Credit Agricole Securities (USA) Inc., Research Division

I had a question -- actually, 2 questions. One is a detail 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 4-point strategic plan you talked about this morning, this is just echoing comments on how do you get paid for hog production. Is the CapEx going to be -- incremental CapEx going to be ongoing for the next 3 to 5 years? Could you talk a little bit more about that? And I'm 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 hogs assets, that would be -- I'd love to hear more about that.

Robert W. Manly

Great. Diane, you'd asked a little bit earlier about volume. We raise approximately 60 million pigs per year, and put that into context, we're slaughtering about 28 million-plus, depending upon industry volumes. We have a significant capital expenditure program that Larry had described earlier in excess of $300 million. That would include monies both for modernization 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. And there, again, that's an example of how we're trying to meld our livestock operations in with the packaged meats operation. It goes back to the commodity sows that we're selling to third parties in the industry. We'll 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 sow operations, with significant expenditures moving forward in terms of our group housing initiatives. We were 38% complete this year moving to over 40% -- or moving over 50% by the end of this year in terms of the sow 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 is the adaptation that we're doing on the housing side. And I think that there's really opportunities to further bring various components of our livestock business into the marketing arena, whether that's the various feed ingredients, certainly the traceability issues are paramount in the minds of people in the export markets as they're trying to struggle through this horsemeat issue as well. I think that there's areas in terms of medication. Medication use, I think, will be another one that will add value in terms of the 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 the business and how can those play to various consumer concerns and issues moving forward and recognizing that the world is changing. I mean, whole foods and that market is the largest growing segment within the retail industry, and many people, maybe not trying to get to the whole food level, but trying to position themselves with positive attributes in the minds of the consumers.

C. Larry Pope

And I'll just react. I mean, one of the comments that Bo didn't touch on but he knows is on his project. We had a plan to move our raising costs 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 choking 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're also, on the plant side, we've got some plant operations that have got some nice opportunities to lower our cost in the ham category and bacon category that we are applying capital that are going to continue to give us those same kinds of economic benefits, which are substantial over in the bacon category and the ham category. 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 and make it happen.

Diane Geissler - Credit Agricole Securities (USA) Inc., Research Division

So how long would you expect to be...

C. Larry Pope

I don't know that we have looked so far more than about 24 months out that this is -- these next 2 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 3 more years.

Robert W. Manly

We've got until 2017 before we'll finish the group housing initiative.

C. Larry Pope

So it's a little bit farther lag on the group housing side. I think on the meat processing side, it'll be faster, 2 years, maybe 30 months.

Operator

We'll go to the line of Tim Tiberio with Miller Tabak.

Tim J. Tiberio - Miller Tabak + Co., LLC, Research Division

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

So let me -- now that's a very good question. Obviously, we've been a significant shareholder. This has been a discussion a number of times, and it 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're doing. In fact, we've been pushing for that for 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 in France to, I like to say, the clowns that are running Italy. There's 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 products. I like the positioning of their brands, and so I think there's 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 once 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'll look more positively on moving forward. We have -- at this point, I have no plans to exit our investment with Campofrio.

Tim J. Tiberio - Miller Tabak + Co., LLC, Research Division

Okay. 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, that trend line could continue even into the fourth quarter?

C. Larry Pope

Just ask me the question, just the beginning of your question one more time.

Tim J. Tiberio - Miller Tabak + Co., LLC, Research Division

Just looking at your package 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 possible or within the realm of possibility that, that could extend into the fourth quarter?

C. Larry Pope

Of course it is. I mean, of course it is. We're trying to give ourself a little bit of wiggle room here. Our packaged meats business is -- it's my phrase. I realize I'm a CEO, so realize it's the CEO language. Our packaged meats business is on fire. I mean, 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 right through promotional programs with our retailers. Our packaging and George Richter and our organization, our marketing team, they're doing a bang-up job in putting these marketing campaigns into real programs that produce real dollars today, as well as build the brand equity. So I think -- I know the 2% to 3% looks a lot smaller than the 4% and 5% that you see, so maybe we got a little bit of wiggle room with those numbers. We might surprise you on the upside.

Operator

And we'll go next to the line of Ann Gurkin at Davenport.

Ann H. Gurkin - Davenport & Company, LLC, Research Division

I just want to follow back on your comments regarding Japan and how should we think about the weakening currency and demand for products -- imported products into Japan as the calendar year unfolds.

C. Larry Pope

Japan is obviously one of the most important markets on the export side, and Japan has got the -- the change in the yen there is certainly having a real impact on 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 falloff in their Japanese sales, and that one, Ann, 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 H. Gurkin - Davenport & Company, LLC, Research Division

Fair enough. 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

Sure. I guess you'd like for me to -- would you like for me to give you the names and the prices...

Ann H. Gurkin - Davenport & Company, LLC, Research Division

Sure, if you care to, that would be great.

C. Larry Pope

And the multiples we pay and how we pay for them. I will tell you, Ann, we are actively looking. I think that there's some opportunities out there that we think could be really instrumental in moving the stock forward. And all I would tell you to do is stay tuned, how about that?

Diane Geissler - Credit Agricole Securities (USA) Inc., Research Division

Stay tuned for the next year or so, fair?

C. Larry Pope

Excuse me?

Ann H. Gurkin - Davenport & Company, LLC, Research Division

Stay tuned to the next year, or sooner?

C. Larry Pope

We'll see.

Operator

We'll go to the line of Robert Moskow with Credit Suisse.

Rachel Nabatian

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

I don't know if there's been any capacity adjustment. Are you talking about the beef plant that Cargill closed or something? I don't know. Bo, do you know...

Robert W. Manly

We will slaughter every pig that's raised in the United States, no matter at what price clears the market. So there hasn't been any falloff and change in the slaughter rates. Frankly, if anything, you'd say that the export markets, that shortfall is being reflected in the decrease in live animal prices that we're seeing at the current time. So I don't think -- and I think from a perspective that we have adequate capacity to handle all pigs we're raising today.

C. Larry Pope

I don't see any capacity shuttering.

Robert W. Manly

No, absolutely not.

Operator

We'll go next to the line of Akshay Jagdale with KeyBanc.

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

I wanted to pick your brain a little bit on the value-added packaged meat side. So obviously, you've had great results and sustainable great results. So I'm assuming you're gaining share in aggregate in your categories, so correct me if I'm wrong there. But if you're gaining share, who are you generally gaining share from? Is it like private label? Is it branded? Is it vertically? I mean, I'm assuming you're one of the only vertically integrated players, so it's got to be non-vertically integrated players that you're gaining share from. And in your opinion, what's the biggest sustainable strategic advantage that you have there, especially as it relates to the branded competitors, right? So obviously, Oscar Mayer is one of the most prized assets there. They've talked about some increased competition from Tyson. Tyson's 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

Well, I guess I'm not going to get on the call and talk about our competition and what 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, that 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've got a competitive cost structure. We're getting a more competitive cost structure, and we think that brings to us a big advantage. So I think it really is that sort of that simple. I think the whole industry is moving towards the guy who's got the raw material is in a better position than the guy who's buying the raw material.

Akshay S. Jagdale - KeyBanc Capital Markets Inc., Research Division

So in other words, I mean, 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 of the stronger brands. Is that how we should think about it?

C. Larry Pope

That's a complicated answer.

Robert W. Manly

Or a complicated question.

C. Larry Pope

I think we ought to deal with that one. Maybe you and Bo want to talk about that a little more at length off-line.

Keira L. Lombardo

We're going to end the Q&A here and turn it over to Larry for a few final remarks.

C. Larry Pope

Well, thank you for listening this morning, and certainly, we had 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 gotten better even in the last few weeks. Many of those who follow the industry know that. And so we're looking forward to a bright future. We think we're looking internally. We've 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 on this business. Kansas City Sausage is a great example of taking live sows, 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 a brand on it, dramatically changing the margin structure. So I think the future is bright. And hang on. Hopefully, we'll have some good things to report. Thank you very much, and have a good day.

Operator

Thank you. And ladies and gentlemen, today's conference will be available for replay after 11 a.m. Eastern Time today running through March 21 at midnight. You may access the AT&T TeleConference replay system at any time by dialing 1 (800) 475-6701 and entering the access code of 282045. International participants may dial (320) 365-3844. That does conclude your conference for today. Thank you for your participation and for using AT&T Executive TeleConference. You may now disconnect.

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