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Smithfield Foods Inc. (NYSE:SFD)

Definitive Merger Agreement with Shuanghui International Holdings Conference

May 29, 2013 8:30 am ET

Executives

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

Yang Zhijun

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

Analysts

Christine McCracken - Cleveland Research Company

Kenneth B. Zaslow - BMO Capital Markets U.S.

Farha Aslam - Stephens Inc., Research Division

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

Operator

Ladies and gentlemen, good morning, and welcome to the Shuanghui International Holdings Limited and Smithfield Foods Investor Conference Call and Webcast. Participating on the call this morning are Mr. Larry Pope, Smithfield's President and Chief Executive Officer; Ms. Keira Lombardo, Smithfield's Vice President of Investor Relations and Corporate Communications; and Mr. Yang, Managing Director of Shuanghui. We will begin the call with some prepared introductory remarks from Ms. Lombardo followed by a discussion from Mr. Yang and Mr. Pope. We will then open the call for questions.

[Operator Instructions] As a reminder, ladies and gentlemen, this call is being recorded. An audio archive of this call will be available shortly after the call has included. Now I'd like to turn the call over to Ms. Lombardo. Ms. Lombardo, please go ahead.

Keira L. Lombardo

Thank you, operator. Good morning, everyone, and welcome to our investor conference call to discuss the strategic combination of Smithfield Foods and Shuanghui International Holdings Limited, which was announced earlier this morning. We would like to caution you that in today's call, there may be forward-looking statements within the meaning of several securities laws. In light of the 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, as well as the disclosures contained in our press release issued this morning. You can ask access the 10-K in our press release on our website at smithfieldfoods.com. Please review our Safe Harbor language found in our press release and in our SEC filings, which describe factors that could cause our actual results to differ materially from those projected by us in our forward-looking statements. With that, I'll first turn the call over to Mr. Yang, Managing Director of Shuanghui International.

Yang Zhijun

Good morning. I'm happy to be with you. We are excited about this transaction. I'm still learning to speak English, but I want to say 3 things about Shuanghui and Smithfield. Together, we can be a global leader in animal protein. China and the U.S. are the most important markets. We are #1 in China. Smithfield is #1 in the U.S. No other combination has such a great opportunity. Chinese consumers like American pork. U.S. farmers want foreign markets for their pork. Growing this export market will be a win-win for both countries.

Continuity is very important to Shuanghui. We have worked with Smithfield for many years. We like it the way it is. We will not change the people, the places, the products, the leaders. We want business to stay the same, but better. This is a great deal for both our companies. We will try to move forward quickly. Thank you.

C. Larry Pope

Thank you, Mr. Yang. This is Larry Pope. Good morning, everyone, and thank you for joining us on such short notice. This is an exciting day for Smithfield, and I'm eager to take you through the benefits of a Shuanghui and Smithfield strategic combination. The combination of Shuanghui and Smithfield, which was unanimously approved by the Board of Directors of both companies, will create a leading vertically integrated global pork enterprise and set the global industry standard in food safety, environmental stewardship and animal welfare. Our board is pleased with the outcome of the process leading to this transaction, and we unanimously believe it is in the best interest of Smithfield and its shareholders.

First, this is an attractive and compelling transaction for the shareholders of Smithfield. The all-cash transaction will provide immediate and certain value and at a great price. Under the terms of the agreement, Smithfield shareholders will receive USD 34 per share in cash.

In addition to this transaction's significant value, the combination of Shuanghui and Smithfield makes great strategic sense. China is a large and growing market and is already the world's single largest protein-consuming country. In addition, Asia as a whole is a tremendous and growing export opportunity for Smithfield. The U.S. agriculture industry, with our best practices in food safety and sustainability and world-class logistics and efficiency, make America a low-cost, high-quality producer of hogs and pork products in the world. This transaction will give Smithfield new channels to market and a strong distribution network in China. We expect to help meet the growing demand for pork in China by exporting high-quality meat products from the United States, while continuing to serve markets in the United States and around the world.

In short, this transaction is good for our business and for the producers and suppliers with whom we work. By combining Shuanghui and Smithfield, we will accelerate both companies' strategic plans, broaden our market reach and create exciting new growth opportunities. Not only is this a great transaction for our company and our customers, there are also significant benefits for American farmers and U.S. agriculture. It creates a stronger Smithfield with more resources to grow and meet increasing global demand for high-quality pork. Shuanghui is committed to investing in Smithfield to produce more food, more jobs and more value in the United States.

Continuity. One of the key benefits from the Smithfield perspective is the stability and continuity this transaction ensures. Shuanghui recognizes Smithfield's best-in-class operations, outstanding food safety practices and 46,000 hard-working employees. There will be no impact on how we do business operationally in America and around the world as a result of this transaction. Shuanghui is committed to maintaining Smithfield's operations, its staff and its management. Shuanghui is also committed to continuing the long-term growth of Smithfield and continuing to work with American producers and suppliers who play a key role in our success.

Let me repeat for Smithfield employees: This transaction will not change their job or responsibilities in any way. There will be no closures of Smithfield facilities and locations. Shuanghui will honor the collective bargaining agreements in place with respect to our represented employees as well as existing wage and benefit packages for non-represented employees. Smithfield and its independent operating companies' management teams and workforces will continue in place after the transaction. Our headquarters will remain in Smithfield, Virginia. I will continue as Smithfield's President and CEO, and the Smithfield leadership team will remain in place.

Last but not least, our commitment to producing good food responsibly is unwavering, and we will continue to provide our customers and consumers with the same high-quality delicious pork products that they have come to expect from Smithfield for more than 80 years. This transaction preserves the same old Smithfield, only with more opportunities in new markets and new frontiers.

Now with respect to sustainability and community initiatives. As many of you know, Smithfield is dedicated to providing good food in a responsible way and has worked hard to remain one of the world's top socially responsible companies. The combined company is committed to maintaining Smithfield's integrity and brand excellence, as well as Smithfield's 6-pillar sustainability initiatives and extensive community support programs. Specifically, Shuanghui recognizes Smithfield's environmental and animal welfare excellence, including our approximately $300 million conversion to group housing for hogs on company-owned farms by 2017, and this important initiative remains on track. Shuanghui has also pledged to continue our philanthropic support of community initiatives and our other investments in sustainability. At the end of the day, this transaction is about growing the combined company into a leading global pork and processed meats producer with the same vision and values of providing high-quality and safe products to consumers.

Before taking your questions, let me quickly discuss the terms of the transaction in more detail and the approval process. As I said earlier, Smithfield shareholders will receive $34 in cash for each share of Smithfield stock they own. The price represents a premium of approximately 31% over Smithfield's closing stock price on May 28, 2013, the last trading day prior to the announcement. The transaction, which we expect to close in the second half of 2013, is subject to certain conditions including, among others, approval of Smithfield shareholders, the receipt of approval upon applicable U.S. and specified foreign antitrust and anti-competition laws, sitius [ph], as well as other customary closing conditions. Once the transaction is complete, Smithfield shares will no longer trade on the New York Stock Exchange and Smithfield will operate as a wholly-owned independent subsidiary of Shuanghui International Holdings Limited, operating as Smithfield Foods.

In summary, we are excited about this strategic combination, which provides significant shareholder value and will benefit our talented employees and lead to growth opportunities for our long-term business partners, including our producers and our other suppliers. Having been business partners for many years, we know Shuanghui well and have tremendous respect for them and their distribution network in China. Together, the combined company will be the leading vertically integrated global pork enterprise with greater access to the large and growing Chinese market and retain Smithfield's world-leading food safety and quality control standards.

That concludes our prepared remarks, and we'd be happy to take a few questions. Operator, would you please give instructions for the Q&A section.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Christine McCracken of Cleveland Research.

Christine McCracken - Cleveland Research Company

Larry, I believe you said that the transaction is expected to close in the second half, but there are required approvals still from U.S. agencies, obviously. I'm curious if you anticipate any hurdles in that process or what you could identify as potential risks in the approval process. Or do you expect it go fairly smoothly?

C. Larry Pope

Well, we've -- I guess, Christine, obviously we're at the front end of that approval process, so we'll have to see how that goes. I think from a pure U.S. antitrust standpoint, we don't see what the Justice Department -- Shuanghui does not have any operations in the United States, so we wouldn't expect any concern with respect to that. As well, we don't expect problems with approval in China and in fact, that's an assured and part of the transaction. And so the only concern that anyone could have, which we don't think is significant at all, is sitius [ph]. And we will, sort of out of the abundance of caution, we will file with situs [ph]. That has a fairly speedy approval process and we don't expect -- we really don't expect much out of that either, but it is a requirement. So from a pure approval process, other than the process in a [indiscernible] somewhere, we don't see much trouble with the approval.

Christine McCracken - Cleveland Research Company

So and just as a follow-up. It seems like everything is going to be cut at arm's length, and I can appreciate that. I'm just wondering, that implies that all the trading, all the management is going to remain in place and, generally, the strategic vision that you've laid out is really all part of the same direction of the new company. Is that the right way to think about that?

C. Larry Pope

Yes. I think, Christine, if anything, this accelerates that strategic growth plan that I laid out in our third quarter earnings release. Shuanghui absolutely 100% supports what we're doing. We've been looking at avenues to maximize the opportunities in China. I talked about it in our calls many, many times. You know that exports are an extremely important part of this industry and have become so important. This just paves the way for a much better export for the whole industry. I mean, Smithfield and the industry will benefit from this. And so Shuanghui has an extensive distribution system across China, and that provides us the opportunity to export products out of the U.S. into China. Hog producers in Iowa ought to be thrilled as a result of this. And U.S. agriculture, whether it's grain or whatever, should be extremely pleased. And so -- and beyond that, this helps balance that balance of payment deficits we're involved in. This helps to put more exports out of the United States. This is not a strategy to import Chinese pork into the United States. This is the strategy to export pork out of the United States.

Operator

Our next question comes from Ken Zaslow of BMO.

Kenneth B. Zaslow - BMO Capital Markets U.S.

Just 2 questions and 1 follow-up. Is there any precedent for a foreign company to buy a U.S. food company this close to the food supply? Could you talk about what you think about that? the second part of the question is, you came out recently obviously about compensating. You think that earnings power is $3 to $5. Look, I mean, I think a minimum of all [ph] that. You get $40. Can you talk about how you came up with the $34 price to sell?

C. Larry Pope

Well, you know, Ken, I'm not going to go into the mathematical calculation of a business transaction. With the stock trading at $26 yesterday, our board has been considering options in terms of how to grow shareholder value. And so our board unanimously looked at this. And I would tell you from a shareholder standpoint, I would think -- I think this is a very good transaction for Smithfield shareholders.

Kenneth B. Zaslow - BMO Capital Markets U.S.

And what about the first part of question, precedent?

C. Larry Pope

Oh, I don't know there is any precedent of this kind of magnitude. This is certainly a large transaction between China and the United States even -- across any industry. And I bet I think it may be the largest. But I think it's a natural transaction. China is a big pork consumer. It's pork-deficit area of the world. We have low-cost, high-quality products to export there. This is one place, Ken -- I'll get on my soap box for just a minute. People have this belief that it's made in China and everything in America is made in China, and there is this concern. But I'd like to tell people open your refrigerator door, look inside. Nothing in there is made in China because American agriculture is the most competitive and efficient in the world. This is the one place America can absolutely compete. We have the soils, the climate and the temperature and the government support, government support for the industry that is extremely good. And so this is the reverse. This is all the reverse and all that America is hoping to happen, this is part of that. This is exporting America to the world.

Operator

Our next question comes from Farha Aslam of Stephens Inc.

Farha Aslam - Stephens Inc., Research Division

2 questions. The first one involves product mix. Larry, do you anticipate Smithfield hog production to go now more racked up? I mean free and a greater portion of your product to be exported. And how do you think that's going to impact U.S. pork supply and U.S. pork availability?

C. Larry Pope

Well, Farha, I think you probably know as of June 1, our plants will be 50% ractopamine-free. And I can tell you today that while there's been -- the Chinese markets have been closed to U.S. pork, Shuanghui had not been closed to U.S. pork and we have been shipping large quantities. They understand the controls we have through our vertically integrated model. And I know there's been discussions about what about the value of farms. Shareholders today should understand that there are people around the world who understand the value of our integrated model and willing to pay a premium to get to it. And so this, to me, this sort of validates our strategy that we had in place for 20 years. This probably does mean more exports of U.S. pork out of the United States. I believe that Smithfield will be the large recipient of that with a major benefactor of that increased exports. So I think it's good for hog farms, and this should be helpful to hog producers in the Midwest. It should be supportive of the industry. I believe this transaction will make the pork industry substantially healthier than it is today for many, many years into the future. This is good for the whole industry, and so -- and that's because we can export. I do think the industry will have to come to grips with ractopamine. It is an issue of contest around the world. We have addressed it head-on. We have said we will make the changes that are necessary. And so the rest of the industry is simply going to have to make their own decisions. But in the meantime, we're going to go where the opportunities are, and I think the industry will see this as sort of a lightning rod to make the change.

Farha Aslam - Stephens Inc., Research Division

That's helpful. And a question for the Shuanghui folks, is this entry into the U.S. sort of an initial step of part of a broader strategy? Or was there something about Smithfield in particular that was notable and the anticipation is organic growth going forward?

C. Larry Pope

I think we might want you to that one more time, Farha. And Mr. Yang's English is a bit -- it's better than my Chinese and I give him high compliments for that. But he's going to use a bit of a translator to try to answer your question, so if you just bear with us with respect to that, so. Max -- and his name is Max. So Max, if you would help him with that. Would you -- Farha, would your view that one more time?

Farha Aslam - Stephens Inc., Research Division

Just repeat the question. Okay, so our question relates to the broader protein industry and Shuanghui's strategy in the U.S. Is it anticipated that Shuanghui is focus is Smithfield and then to grow organically? Or is this an initial entry into the U.S. and the anticipation is that they want to grow throughout multiple protein in the U.S.?

Unknown Executive

[Chinese]

Yang Zhijun

[Chinese]

Unknown Executive

So the intention of this transaction is to build a globally competitive and a leading pork protein producer, and we see a lot of synergies between Shuanghui International and Smithfield Foods. In the past 28 years, the Shuanghui Group, the Shuanghui International has the sales growth rate of more than 30%. So we see a lot of growth, continuous growth.

Yang Zhijun

[Chinese]

Unknown Executive

So in China, Shuanghui is focused on the processing of pork protein. So other than pork, for now, we don't have other intentions into expanding to other proteins.

Operator

[Operator Instructions] That question will come from 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 how the time frame -- how long you've been in discussions with Shuanghui?

C. Larry Pope

We have -- Heather, we've known the Shuanghui people now for 4 years. I've been having discussions with Chairman Wan Long and Mr. Yang who now for, it's been -- gosh, it's been a growing relationship for a year. We've had enormous respect for each other for several years. We have attempted to do a transaction with these folks as early as 2000 -- I guess that was 2009 we started to try to put something together. We saw the opportunity and pricing's always been a bit of an issue. So I mean -- so this is an evolving process. It's been a growing business relationship. So many people in the industry think that Smithfield hasn't been doing anything in China because we haven't announced anything. I assure you, my Chinese language has not gotten any better, but I've gotten much better at chopsticks. But we have -- we think that's the opportunity, and we've been attempting to put something together because these are the right people. In China, these people have significant value. So that, the Asian market is a huge opportunity for us as a company, and this has been under discussion for some 4 years. We've just not been able to put something together until today.

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

Okay. And then my follow-up question on the export front -- and you talked about you anticipating a ramp in industry exports to China, or industry exports period. First, do you expect that happen before the deal closes? And secondly, do you expect Smithfield to greatly ramp the proportion of its exports to be going to China? Or do you anticipate a mix of exports not changing that much?

C. Larry Pope

Well, obviously, I can't speak for the whole industry. I think our business with Shuanghui has been growing now for certainly the last year. Our business with them has been growing very nicely. In this calendar year, it's been growing almost geometrically with them. Exponentially, if you look at the export data out of the U.S., you'll see confirmation of that, and it's not all fowl [ph]. It is muscle meat, which, as you know, has been the important part of the export market in terms of driving value. And so Shuanghui and Smithfield have identified opportunities to continue to grow that. And again, it's just -- it's an execution issue. I don't think the timing of the closing of this transaction really impacts their decision with respect to buying product. They're going to do it -- we've already grown exponentially this year and continue to move forward. So I think we will continue to have -- identify the synergies, talk about where the opportunities are and just seize those opportunities, and the transaction will close through that.

Operator

Thank you. That concludes today's conference call. You may now disconnect your lines, and have a nice day.

C. Larry Pope

Thank you.

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