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Executives

Keira Lombardo - VP, IR

Larry Pope - President and CEO

Bo Manly - CFO

Analysts

Christina Mcglone - Deutsche Bank Securities

Diane Geissler - Credit Agricole Securities

Rohan Patkar - KeyBanc Capital Markets

Christine Mccracken - Cleveland Research Company

Farha Aslam - Stephens Inc.

Ann Gurkin - Davenport & Company

Ken Zaslow - BMO Capital Markets

Ken Goldman - JPMorgan

Tim Ramey - D. A. Davidson & Company

Robert Moskow - Credit Suisse

Smithfield Foods Inc. (SFD) F3Q12 (Qtr End 01/29/2012) March 8, 2012 9:00 AM ET

Operator

Welcome to the Smithfield Foods fiscal 2012 third quarter earnings conference call. (Operator Instructions) I would now like to turn the conference over to Ms. Keira Lombardo.

Keira Lombardo

Good morning. Welcome to the conference call to discuss Smithfield Foods' fiscal 2012 third quarter results. 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 2011.You can access the 10-K and our press release on our website at smithfieldfoods.com.

On our call today are Larry Pope, President and Chief Executive Officer; and Bo Manly, Chief Financial Officer. This is Keira Lombardo, Vice President of Investor Relations. Larry will begin our call this morning with a review of operations followed by Bo who will review the company's financial results. Then Larry will provide our outlook for the future, after which the line will be opened for questions. Larry?

Larry Pope

Good morning. Thank you, Keira, and good morning to everyone. I'm extremely pleased to report the results of our third quarter. We reported $79 million versus $202.6 million last year for the quarter at $0.49 a share compared with $1.21.

On the surface, that looks like quite a difference between the two years. I hope you had opportunity to look through the press release and Bo will speak to it more fully. But there is some significant items in terms of days that were in the last year with an insurance settlement as well as a charge this year coming through our equity accounting with a couple of Campofrío that accounts for over $0.60 a share in just those two items and there are numerous others.

So as you look at the business more fully and understand the numbers more fully, I'm extremely pleased with this third quarter results. And as I think about it, who wouldn't be. We're seeing very strong fresh pork results. When I look at 6% return on sales and $11 ahead and $0.15 a pound on our packaged meats in spite of the fact that all the proteins are up significantly on a raw material basis, that makes me feel very, very good.

Beyond that, our hog production business which is showing up very small loss for the quarter is really relatively insignificant. Seasonally, that's always the case in the third quarter. So once again, that's with our exports is bullying off the page and it's been extremely good period for that. And I don't think that's come anywhere near to an end.

And even beyond that, our interest costs are down, which means the balance sheet is in terrific shape. Our pension costs are down. We had a great holiday ham season which is traditionally an important part of the year for the company's profitability. We were able to grow both volume and margins in those categories that are extremely important to me.

So as I look at the quarter and think about where we are from a business standpoint, I would tell the listeners this morning that I am sleeping very well. As I had said a couple of years ago, I wasn't sleeping through the night. I assure you I am sleeping very well these days. The business is performing very, very well.

On the fresh meat side, those margins were driven by profitability in just the first two months, following the end of the calendar year. Our results in fresh pork have declined somewhat; however, I don't want you to get the impression that our fresh pork business is bad. We've got a lot of opportunity to improve where we're at even at the numbers we've reported, but this is a business that seasonally changes after the first of the calendar year. I think all of those who follow the company know that, and we've seen some downward trend in our fresh pork results after the first of the year.

Importantly, on the packaged meat side, that business is solid. We've got topline growth in very significant numbers. We've been very, very successful at passing through the raw material cost increases that the industry has been seeing. We've been successful at passing those through, which is in part the result of our focus, our capacity changes and as well the fact that we have began to more focus our attention towards consumer marketing, programs that we think are helping us and our relationships with our customers and helping our brands to build equity that allows us to have a stronger position in the marketplace. So I'm extremely pleased with that.

I hope you saw that we've made the announcement previously and reinforced that in the press release with our marketing association with Richard Petty Motorsports. We've gone back into NASCAR. We've been in this direction before. We think there is a tremendous tie-in between the demographics of the people who eat our product and the people who follow NASCAR.

We are highly focused with our marketing people which have significantly strengthened our market programs with tying in and activating that relationship through to brand and product growth as well as new products. I think as we go through the 16 race program, it's a multiyear agreement, I think you'll see that we will be activating our brands through that in a significant way as we go into the year. And you take that combined with the relationship we have with Paula Deen as well as the focus we've had on television advertising both for the fall season and those on East Coast saw as well as that with our Farmland and Armour, Eckrich brands in the Midwest and upper Midwest.

I think we are beginning to change the focus of this company on a significant way and we're beginning to have an attachment to the consumer in addition to our customer. And I'm extremely pleased with the way that's going.

For the first time I can tell you that we are developing a product innovation pipeline which is a phrase not often used at Smithfield Foods but I can tell you it is now being used in the halls on a regular basis. We're focusing on new products coming into the marketplace. Some of you have already seen our pouch bacon product at specific retail stores and that's been very, very successful. We've got a number of other products that are coming to market very soon but I think that we'll have more to talk about as the quarters come and go.

I think you'll see us talking more and more about that into the business and I think that's the future for this company. It's allowing us to pass through calls. It's allowing us to be a point of difference with our customers and I think it's changing the mix of the business in a way that that is sustainable and will help us maintain these margins as we face these raw material cost increases.

Clearly an important part of all of our products for the profitability on the Fresh Pork particularly as the export business and I know you're all interested in our comments surrounding them.

Our export business is up substantially more than the industry. You're all aware that it's time for the Asian market and that we've been the recipients of some special business in Asia that has certainly the impacted the numbers in a big-big way. However, that's not the only country that's doing well. We've got significant increases in Japan as well as Korea, in addition to other parts of Asia.

And internally, we are changing our thought process around the exports. And we're moving towards the concept of a trade channel away from an opportunistic sale. We are putting people now in-country, in place to build relationships through the trading business into the customer relationship business.

And I can tell you that the reorganization we made a couple of years ago, putting all that international groups together has been very effective. No question to tease you as dollar has helped that process and the fact that there has been a shorter jugs of port outside the United States which has given us a competitive advantage. We have taken advantage of that competitive advantage and the opportunity and we're now putting people in place for building relationships through the trial, if you understand what I mean by that.

The free trade agreement as you know is now in effect and starts to take in effect in Korea, I think on March 15. That again, Korea has already a focus of the company. We're up substantially for the year. That will be another opportunity as well as we're already doing business in Columbia and having conversations with people in town.

So the export business now, we're seeing as a just like the food service business in the retail business. We're seeing that as another channel to the business not just a hit-and-miss business. The food service business is up. Our retail business is slightly off 1% on food service business is up 1%. And our core brand in the retail side is doing fine.

In fact, our value brands which you would expect with a tight dollar in the consumers pocket, our value brands are doing better than our premium brands. Our core brands are doing well.

In the food service side of the business as we've seen people migrate back to the restaurants and it's not just McDonald's and Subway or Wendy's. It's the regular business that was sold hit-so-hard back during the recession. People are eating out again and that's going to continue. That's going to up and down as people see the economy but that's a part of it for the quarter.

In the Hog Production side of the business, we've got our cost improvements program. Now that it's starting into its third year through the second year, we are extremely pleased. But I can tell you today that we will accomplish the goal. We will start to see ourselves come back up to full volume in hog production, starting the beginning of the third quarter of this fiscal year.

It has accomplished what we thought it would, which is $2 a 100-weight and $5 a head. That will happen. The volumes will start to come back before the impact because of full P&L will come in. But we have paid essentially all of the cost and all the capitals have been paid. So now we're getting to the benefits side.

As well as you saw the announcements Smithfield has made relative to pen gestation migration, we are 30% converted as we move towards a 100% conversion of our company-owned firms by 2017.

For the first time in a very long time the vertical integration program that we put in place a long time ago, because there has been so much negative discussion about last production side of the business. We're now starting to see some real tie-ends between the meat processing business and the live production of the business.

We've got competitive points of differences that our customers understand and think that we can take advantage of. We've got genetics that allow us to provide a product differentiation into the Japanese market. That gives us a significant point of difference. It's got big opportunity. It's already having its effect in Japan.

We've got feeding regimens that we can put in place both to feed wheat instead of corn as well as take peeling out of the product and clear the products for the Japanese market, product for the Chinese markets and access customers with feeding regimens. Now we've got pen gestation, so to the extent customers want a product differentiation like they have discussed. Some have discussed with us and we're having a number of calls now. We're in a position to meet that need.

So I see the point that our hog production business is starting to tie back into our meat processing business and give us a point of difference. And I am for the first time in a long time I see that as an opportunity for the company and should give us a place in the market as others will find it difficult to trail with us.

Internationally, the big news is that the announcement by Campofrío, that they have taken a significant charge to the P&L for the quarter and we would refer you to some of the information they have on their website. They'll speak about it more clearly. But we are extremely pleased. These are some of the changes in that business that we needed to see.

We've been pushing for this time on the board. We've been pushing them to do that now for some significant time. They have made the decisions to make some of the changes in their business model that needed to be done. They've made that decision. There's some implementation time associated with that. But that is good. That's good for our investment in Western Europe.

And finally, we've had our investment in Romania for a number of years. We now have an export license. To those on the call, you may not understand the value of that. That allows Romania to access some of the higher value product opportunities in Western Europe that we have not had the opportunity to do. And that's a big positive for our investment in Romania.

We've been working on for a number of years. And we're the only one in that country that has it. So that's a positive for that piece of the business. Obviously, that's a smaller piece of our overall international business. But again is a positive.

So I'm pleased today, the balance sheet's in great shape. We have lots of liquidity. Bo will talk to that. And see the business for our retail and food service customers never better. I think I can say with a lot of confidence, we don't have a single bad relationship with any customer of any significance to Smithfield, whether food service or retail ad that gives me comfort.

We have meetings with them. I was just in Japan about four weeks ago, visiting all of our Japanese customers, tremendous business. I was just in Des Moines just a couple of weeks ago with Vice President Xi and other Chinese customers as well as Chinese opportunity for people who want to talk to us.

We have a great reputation there. In that country, I am feeling very good with our domestic relationships. And I'm feeling very good with our Japanese and the opportunities to grow our business internationally have never been better. So I'm sleeping well. And I'll talk to you about what I see coming down the road here, after Bo has an opportunity to give you his financial report. Bo?

Bo Manly

Thank you, Larry. Good morning, ladies and gentlemen. Smithfields third quarter net income was $79 million with an EPS of $0.49 compared to last year's third quarter net income of $203 million and an EPS of $1.21.

While this year's third quarter results fell short of last year's record performance, we are very pleased that when earnings are adjusted for the impact of the Campofrío non-cash charge. This was our second best third quarter on record. Adjusted non-GAAP Q3 EPS was $0.69 this year versus a similarly adjusted $0.84 last year.

Strong results were delivered through consistent performance in packaged meats and our core brands in difficult market conditions as well as record third quarter operating profits in the international segment before the Campofrío charge. Principal reason for the year-over-year quarterly earning shortfall is a decline in fresh meat profits from record-high margins a year ago. That said, fresh pork margins remained above normalized range.

Fiscal 2012 nine months year-to-date net earnings were $282 million generating an EPS of $1.72 versus $423 million with an EPS of $2.53 in the same period last year. Both, current quarter and year-to-date operating profit and earnings per share include a number of noteworthy items impacting performance in both this year and last.

Year-to-date and last year's items have been highlighted in our discussion of prior periods. When these required to both period, the adjusted non-GAAP year-to-date operating profit was only 6% below last year's record. Non-GAAP nine months EPS was $2.16 within 1% of last year's $2.18 earnings per share.

Sales for the quarter were $3.5 billion, up 9% compared to the prior year quarter. Strong revenues growth was benefited by higher average selling prices across all segments. The 11% total pork segment sales growth was led by a 19% increase in fresh pork sales. Contributing to fresh pork sales increase was a 7% growth in volume and 11% higher average unit sales price. A 6% increase in packaged meat sales was driven by a 7% higher unit price coupled with a 1% decline in packaged meat volume.

Our production sales grew 17% in the third quarter, as higher average unit market prices continue their upward trend increasing 23% quarter-over-quarter. Volume declined 6% in the third quarter year-over-year, reflecting the impact of the hog production cost saving initiative and the sale of non-core hog farms in fiscal 2011. As planned, the cost saving initiative, volume will begin to recover this summer.

Gross profit margins for the third quarter was 11% down from 14% in the third quarter last year. The most significant reason for the gross profit decline was an erosion of fresh meat operating margins.

Consolidated operating profit followed a similar pattern of a moderate decline from last year's outstanding performance. After consideration for appropriate non-GAAP adjustments, total operating profit declined in the recent third quarter to 6% from 8% in Q3 last year and 7% in our most recent second quarter.

For fiscal 2012, the nine months year-to-date adjusted operating profit was 7% compared to 8% last year, principally due to reduction towards normalized fresh meat margins. Third quarter pork group segment operating profits declined $59 million to $196 million. This was principally due to a $52 million decline in fresh pork operating profits.

Strong margins in packaged meats translated to a solid operating profit at $117 million with a $0.15 profit per pound at the high-end of the normalized range, but down a $0.01 from last year's quarterly results. We are very pleased that in the phase of lower total industry packaged meats volume, we maintain tonnage equal to the same period a year ago in our highly important core brands, representing over half of our total packaged meat sales.

No one is ever pleased to report, the total packaged meat volume decline of 1%. However, in the phase of a 2% to 3% decline in overall industry volume, we believe we gained share in a difficult market environment. We are very satisfied that while we saw another quarter with packaged meats raw material price increases, our brands and new consumer marketing efforts enable us to recover substantially all of the increased cost of good sold.

We believe we will continue to return packaged meats result at the high-end of the normalized range for the balance of this year. We believe we have made great strides in building a much stronger packaged meats business. We are investing in new capacity and promoting our brands on a coordinated basis with a goal to increase tonnage, gain share and grow profits, as consumer confidence and more normal spending resumes. We have supported our core brands with over 20% increase in map spending for the first nine months of this year.

With regard to Fresh Pork, I've been in the meat business for a long time. And I've never thought I'd be disappointed with fresh pork results when operating profits were over $10 per head and above the normalized range. The fresh pork operating profit fell 40% to $79 million from last year's third quarter record.

USDA fresh pork cutout values increased 11% quarter-over-quarter, supported by strong general export demand and sales to China. However, package margins were squeezed by a 23% increase in the ISM live hog price, reducing margins both compared to a year ago as well as to the immediate prior quarter. Fresh pork margins are choppy and continue to be under some pressure. But we believe we will produce results above the normalized range for the full fiscal year.

Third quarter hog production operating profits declined $4 million year-over-year as per head hog losses increased from $1 per head to $2 this year. Higher grain prices drove raising costs from $52 per hundredweight in Q3 a year ago to $64 this year. We have a current outlook for raising costs that remains in the mid-60 short-term. The results in the third quarter about this and last year's reflect seasonal price weakness in the fall winter period. We expect a rebound in the fourth quarter.

Included in our international segment results in this third quarter is a $39 million non-cash charge for equity interest in the Campofrío Food Group. The Campofrío Board recently announced the multiyear comprehensive business and profit improvement plan. Our 37% ownership stake resulted in a non-cash equity method charge of $39 million or $0.18 per share.

The program successfully implemented, will significant improve long-term results to improved efficiencies, increased utilization and growth. We do not anticipate any remarkable impact on our share of earnings from this initiative over the next 12 to 15 months. We applaud management's efforts and share our wholehearted support for this project.

International segment operating profits for this recent quarter were $6 million, including the $39 million Campofrío charge. Excluding this unusual item, operating profit would have been approximately $45 million, setting a new third quarter record and surpassing last year's $35 million profit.

Overall these improved results were led by strong profitability across all overseas hog production operations in Poland, Romania and JVs in Mexico. We're very pleased with the performance rebound in the international segment. We expect to continue strong results for the balance of the year.

The year-over-year comparison of third quarter corporate segment is not meaningful on its face, due to last year's inclusion of the $121 million insurance gain. Corporate segment quarterly expenses are nominally lower on an apples-to-apples basis. Income from affiliates declined $37 million due almost entirely to $39 million Campofrío charge.

Third quarter SG&A declined $33 million or 15% year-over-year, principally due to lower compensation and pension expense. Quarterly interest declined 30% year-over-year, due to lower borrowings and more favorable rates.

Our effective tax rate for the third quarter was 36%, spiking up from 31% in the last quarter due in large part to the tax impact for Campofrío charges. We continue to expect the full year effective tax rate to between 32% and 34%.

Depreciation for the quarter was $59 million. We anticipate full year depreciation to be about $240 million. Full year capital expenditures are estimated to be approximately $300 million, as we invest modestly above depreciation levels to enhance our packaged meats capabilities.

We ended the third quarter with $1.2 billion in liquidity, including $164 million in cash, even after repaying all outstanding short-term borrowing during the quarter. During the recent quarter we bought $23 million face value of our 2014 10% bond, triggering the recording of $5 million in early debt extinguishment charges. These charges represent $0.02 per share.

Strong earnings and cash flow in this fiscal year on top of record results last year have continued to demonstrate solid credit metrics. Net debt to capitalization improved to 34%, the lowest level in anyone's memory. 12 months trailing debt to EBITDA adjusted ratio tick down to 1.7 to 1. And EBITDA interest coverage clocked in at 5 to 1.

The strength of these improved credit metrics continue to be recognized by the rating agencies. During the quarter we received an upgrade from Fitch Rating Agency two notches to BB. This is the sixth rating upgrade from the collective rating community over the last 12 months.

We do not have any domestic repayment requirements until May of 2013. We intend to invest in growing our business segments and investing in our core brands.

Wrapping up my remarks, we are pleased with a strong quarter and nine month performance. Industry fundamentals remained strong. Domestic economic indicators seem to have finally bottomed out. We are particularly happy with profitable growth in market share in our core brands.

Our core brands have continued to perform, despite difficult demand conditions. We anticipate margins remain in normalized range for the year. Enhanced marketing focused on product innovation to meetings in health is gaining traction with our consumers.

We continue to see export demand supporting fresh meat profits. We expect hog production profits to depreciate from winter lows and fundamentals in the hog production models throughout the industry predict profits throughout 2012 calendar.

International results will continue to show strong performance. We believe we'll finish this year with continued good results. We're well-positioned for another strong year in fiscal 2013. We will continue to concentrate on balance sheet, capacity development, cost reductions, improved international results and focus on core brands.

Thank you, ladies and gentleman, for your time and attention. Now, back to Larry.

Larry Pope

Thank you, Bo. I think that was a good report. And Bo gives a lot more color, so are my comments. Looking beyond into the fourth quarter and beyond, I think you're all aware that protein both beef and poultry looks to be down going forward. Pork might be up slightly. So the fundamentals of this business are very strong as we look into calendar 2012 and knowing the beef cycle is well beyond even that.

So that certainly means our protein is going to be favorable and beef is likely going to be more expensive and so is poultry. So that's going to help the pork industry. As you saw the Favorable Crop Report in December, there doesn't appear to be much growth in the U.S., maybe slightly. Europe is not having much.

China is debatable whether it's up or down. But I don't think it's going to be significant. I think the data coming out of there is pretty sketchy and not easy to get good firm handle on expansion or contraction. But the bottomline is my discussions with people in that part of the world is the demand for U.S. pork is going to continue to be very interesting. How about that? They are certainly not open to their plans, but they are certainly very open to talking about it. So that's a good sign I think as you look at the Chinese market.

I see no change in this U.S. dollar policy, which means we are going to have U.S. dollars that are going to be cheap. So our pork is going to be cheap on a relative basis. We think these tariffs will be coming down. The USDA has predicted exports will be up for this calendar year. So that bodes well for the industry. The free trade agreement goes into effect. There is general trend towards lowering tariffs related to our products.

The grain markets look to becoming our direction. The hog market is certainly looking favorable even into the fall. And where the markets are not favorable, we've put hedges in place. So I'm not so terribly worried about the live production side of the business. I think we've taken some measures to protect our business there. I think that we feel comfortable we're going to be okay on the live production side regardless of what happens. And I think it's going to be coming to us.

I would tell you that we are not happy with where we're at. We think we have a lot of opportunity to improve our brands and grow the equity in these brands. The U.S. retail market is not growing for many of the categories, many of us in the industry play in. So we've got to create new products to create demand for those categories and we know that. We have a number of people involved in just that project. So we are not blindly hoping that we can simply take share by some aggressive pricing programs. We're going to do it the old fashioned way by creating new products that consumers want. And I think that we're doing that. And I think we've got a lot to fare.

Beyond that, we compare ourselves with others in the industry and data we have access to across our own businesses, and we have a lot of opportunity to lower our cost and improve our margins and it is identified. We are on it. So I think that whether it's in the meat processing side of the business or the live production side of the business or the international side of the business, we know what to do. From a management standpoint, you're betting on us. If you buy the stock that we can execute it.

I hope we've shown you in the past that we think we can. We got an excellent balance sheet, as Bo said. We have excellent liquidity. We have access to the capital markets that we want them. We don't need them. So we've got money in the banks. Our balance sheet is strong and getting stronger. So I think we are in a position where we can have a lot of flexibility to do what we want to do to grow this business. And I'm excited about that. We will continue to focus on these brands.

I hope you see us talk to you again and again and again on how we're moving away from a discussion about nothing but the grains and the hog business, because we're protecting that with the futures and talk about the brands and the products. That's where we think this business has the potential to grow. We're going to continue to talk about that and try to ensure to you again and again that we're taking protective measures when it comes to the commodities. We've demonstrated with our brands we can pass through cost and the pricing, and that will continue to be an issue as some of these products get more expensive.

But it's a bright future. I'm extremely optimistic that the rest of the year is going to be good. Fresh pork is volatile, but the fundamentals are very good for us and I'm very pleased as I report to you this morning.

With that being said, Keira, we'll open up the questions.

Keira Lombardo

Thank you, Larry. In order to provide opportunity to as many analysts as possible to ask questions, we request that you ask only one question. If you have another question, please get back in the queue.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question will come from the line of Christina Mcglone.

Christina Mcglone - Deutsche Bank Securities

I just wanted to clarify something. Larry, you talked about strong holiday ham season and you've talked about very strong exports. But when I look at the pork cutout, it looks like it's not exhibiting the typical seasonal strength that we see at this time of year. So can you reconcile that for me?

Larry Pope

The fall holiday ham season is the October, November and December period. Our fresh pork results were excellent in October, November and December.

Christina Mcglone - Deutsche Bank Securities

I thought you were referring to Easter. Sorry.

Larry Pope

No, I said the fall holiday season. Easter is still around the corner. But, Christina, you got to understand that routinely January and February are some of the worst months in the year for the fresh pork, and we're nicely profitable in fresh pork. I'm not embarrassed by our fresh pork margins at all.

Christina Mcglone - Deutsche Bank Securities

Just usually in March, you start to see an uptick and we're not seeing that. Is it just too early to tell? I'm just wondering if maybe you're seeing stronger results than the overall industry.

Larry Pope

Well, it is. I don't know if it's too early to tell. The margins are certainly down from November and December, but our fresh pork margins are fine. At this time of the year, we oftentimes just not lose the money. It'll be unusual if we lose the money at this time of the year. The exports continue to be extremely strong. In fact, we're shipping very large quantities of exports which support the market. I know it's a touch weak, but I think we've all changed the bar pretty far.

Operator

Next we go to the line of Diane Geissler.

Diane Geissler - Credit Agricole Securities

I have a lot of questions coming to me, just trying to disaggregate sort of the benefit of the export markets. And we've done a lot of work on pricing into Asia and China in particular versus what you see in the U.S. market. We're seeing better prices in the export markets and for some other stuff we can sell in the U.S. If you could just talk about, because to Christina's point, I think obviously you're running ahead of what the spot cutout is and I'm just trying to aggregate how much of that is export benefit and then what's the longevity of that and then how much is from the stuff you've done internally to make yourselves more efficient and that's a longstanding improvement of the base business?

Larry Pope

I think I would start off by telling you we're now looking at the export markets as a freight channel. And that's important. You need to understand that every time we do an export sale, it's sort of margin enhancement. We don't see that as an opportunity to get rid of excess product on the domestic market. We see it as an opportunity to improve our margins.

And I will tell you that beyond that, our export customers appreciate some of the things we do on the farms are lot more than our domestic customers. And I think you've probably heard that from many other people in this industry. They want to know the programs and the feed regimens and the genetics and as well they ask for specialized packaging programs that our retail customers in the U.S. don't care so much about.

Now that being said, this industry is killing a lot of hogs. So we need these exports or else this thing is going to fall flat on its face. I don't see a lot of risk to that today and that seems to be growing in the other direction with the free trade agreements going into effect, cheap U.S. dollars, the USDA projecting that. It's clearly a positive in this business. It's always a risk, but it's positive at this point. We do focus on the export markets like we never have before as a company. And we do sell well. We do sell programs to our export customers, not just products. So I think that does help us.

Diane Geissler - Credit Agricole Securities

Do you see the April quarter as stronger than the January quarter? Is that what I should be reading into your commentary about how you normally get in the January-February period and then things improve? Should the April quarter in terms of profits be better than the January quarter then in fresh pork?

Bo Manly

As I indicated in my remarks, we continue to be under pressure compared to where we were perhaps six months ago in fresh pork. So it is a difficult environment that we're looking out there. I indicated in my comments that we will be above normalized range for the full year. We will probably take some choppy activity between now and the end of April in that time period, but we're still confident of the full year results.

In terms of the comment about longevity of exports, I don't think anybody can underscore the fragile nature of that as Larry has time and time again over these calls. But it's been our responsibility and our charge to really expand the market base. And we're selling pork products today from this country to other areas where we never did before in terms of Smithfield at least. And that includes things like Panama. It includes things like Colombia that help us spread that base.

At the same time, we're investing in assets in overseas areas. We've got our people in China. We've got our people in Mexico. We've got people throughout Asia and Japan that we didn't have before. And that's helping pull this product through the channels and give us better insight and understanding what's happening with international marketplaces and better able to sell products there.

Larry Pope

I don't want to mislead you in any way. I don't expect the fourth quarter fresh pork results to equal the third quarter fresh pork results. We had excellent November and December as we were shipping giant volumes out of this country into one Asian country which you could probably likely guess. And that volume is not there today. So I want to be very clear that the margins in the fourth quarter in fresh pork I do not expect to be equal to the third quarter fresh pork. So let me be crystal clear without you getting some misunderstanding there.

But that does not mean our fresh pork results in the fourth quarter are going to be bad, quite the opposite. But I don't think given where we are in November and December, I don't believe that we're going to equal those kinds of margins in the fourth quarter.

Operator

Our next question will come from the line of Akshay Jagdale.

Rohan Patkar - KeyBanc Capital Markets

This is actually Rohan Patkar sitting in for Akshay. My question is regarding packaged meats volumes last quarter you guided to 83% increase and it seems as those volumes came in rather than expected this quarter. Can you please explain why volumes came and we couldn't expect it and what your expectations are for the fourth quarter and for fiscal '13?

Larry Pope

They did come in line. They did come in below what we had expected. I can tell you that we were somewhat surprised at how the some of the retail business has suffered a bit. Our food services up. The whole industries see that exact same thing. The others in the industry perforated before us. For sometime I was concerned that ours was worse than the industry, as I've seen the others but that were actually better than the industry.

So I think there is a shift, a little bit away from the retail market back to food service. If you remember the second quarter, we were talking about the fact that our food service have had a good first quarter, a bad second quarter. Now food service is having a better third quarter, and back away from the retail Smithfield is 75% a retail company. So we feel some of the retail impact on different than other.

So I think we are going to modify. We did have plans in place to move our core brands up 3% for the year. But I don't think we're going to be able to accomplish. I think it's the reality of it. What is $4 gasoline or higher price raw material is reality, as this going to be hard to do.

Bo Manly

I would like to also point out industry information about what is happening within the packaged meats area. It's difficult to get precise data on a real time basis. But I think we have been benefited by some of the analyst out there that can do some work for us. I think even you own organization had indicated that packaged meats volume for the industry was down somewhere between 2% to 3%.

And therefore we look at our decrease of only 1% is really being a pick up in market shift. So while we think the overall market was down, we were less than the market in terms of follow-up and we look at that as positive trend. It's a very difficult market condition.

Larry Pope

And we look at the ROI data of the product categories, we fully compete and our numbers were favorable to that. I don't like the overall numbers. But I like our comparison to the numbers. And so I can only like it if the people shifting away from retail towards food service and the fact that people's dollars are being scratched and you are seeing packaged size changes from 16 ounces pack to 14 ounces to control price point at the retail case. And I understand retailers wanting to do that. And so I think it just a natural part of the business. We will react to that.

Bo Manly

And I'll also like to underscore as you look at the competitive structure out there I think that will fall off some volumes in several of the major competitors and I think we probably had the least drop off, at least from the physical evidence we've seen so far compared to our competitors.

Rohan Patkar - KeyBanc Capital Markets

And if I can just ask one more quick question on international EBIT, third quarter was ahead of expectations and on a run rate basis well ahead of the top end of your normalized range of $50 million to $125 million. What are your expectations for fourth quarter and for '13? We'll appreciate if we gets some color on this.

Bo Manly

This is the second question, so we rather not make this a pattern but as I had indicated in my remarks that we do continue to see strong results. The big pick up we've had this year over the last year, it's been hog production area. And we continue to have a good balance between grain cost and live markets in Western and Eastern Europe. So it should remain strong.

Operator

(Operator Instructions) We now go to the line of Christine Mccracken.

Christine Mccracken - Cleveland Research Company

Larry, exports have been a big part of the story, I think for the last year end. And it sounds like it's going to fairly pickup here. Going forward, I'm just assuming now as a percentage of your Fresh Pork sales where are you in terms as a percentage?

Larry Pope

I would tell you, Christine, that we are essentially sort of 30% to refer depending on where why are in calculating that. It's become a very big piece of the business. And would have used my phrase of hooked on heroin a number of times and I'll continue to use that. But it looks like its here to stay and looks like it will continue at these kinds of percentages certainly above 25% of this industry. I think it could be the whole industry on a go-forward basis and what have been flowed depending on whether we get some of these special arrangements. But for the last while, it's got to be a bigger piece. We get more than our fair share of the industry because of some of the things we can provide to export. So it's a big piece, Christine.

Operator

Next we go to the line of Farha Aslam.

Farha Aslam - Stephens Inc.

When you will get your hog production area totally one of the reasons your Fresh Pork margins are little bit weaker than April quarter are because of high hog prices but you guys are vertically integrated. So could you share with us kind of the profit outlook that you're seeing in hog production. Where you're seeing those profits per head is over the next few quarters. And kind of what you think that normalized profits per head?

Bo Manly

I think going backward from the several questions you've asked, I apologize. We continue to maintain that our pork production will be in the normalized range in terms of where were our profitability for this year. And at this point, we're developing our budgets for next year. So it will be premature to talk about fiscal '13. We'll do that more as we get into this particular quarter and more in the next call.

But in terms of what do we think that will run on sequential basis, we believe we'll have our pickup in profitability in all production in Q4 versus Q3. Seasonally it happens that way. And it's really beyond the ability to pass on that higher cost through the fresh meat complex and hopefully enterprises meets as well. So we think that we'll probably follow a similar pattern of what we've seen in the past that it will pick up in our hog production profits putting a little pressure fresh pork margins, we'll move that towards April. But we do have some good holiday and seasons is coming up Easter, as it was mentioned earlier in the call and exports volume continues to help these very supportive fresh pork's. So I think it's really continuation trends we see, so far this year.

Larry Pope

I'd be surprised if we didn't move into fourth quarter of hog production back into the normalized range. Where we lost money in the third quarter, they'll likely move back into the normalized range as well as I look at the futures markets today, it not changes, you guys know that. And we are more heavily hedged on our grain side then we are on the live hog price side. It looks to me today that we should be profitable every quarter in hog production next fiscal year. So do you agree with that?

Bo Manly

It will be tight in Q3 as it always is and there are lots of things that could impact that.

Larry Pope

As of right now, we should be profitable every quarter next year in hog rates.

Operatorb

Next we go to line of Heather Jones.

Heather Jones - BB&T Capital Markets

Regarding Campofrio they had a really strong Q4 and they recently offered guidance for significant margin improvement from now through fiscal '15. I'm wondering do you anticipate that significantly benefiting your fiscal '13 results and would this make you more interested in taking another consideration of increasing your interest there, given their profit improvement plan?

Larry Pope

Well, Heather, I'm going to tell you that I would not comment on whether we're going to make a further investment. Campofrio, I will tell you that we are pleased by the actions they have taken. I think Bo said in his comments that we don't expect any near term impact for next fiscal year on our earnings for our equity portion of that.

And that's a deadly. As you read their numbers you cannot literally take their numbers and multiply by 37% and apply it to our P&L because of the differences between Europe accounting and U.S. accounting and as well we have a different carrying value on our books and they have on their books. So you should understand that. So it's certainly in the range but it's not literally the way you calculate it.

However, I think this is a positive. I think they do have a situation where this could significantly improve their earnings. And they certainly got a multi-year projection. I would refer your questions to them. They're publicly traded company. I'm not going to speak for Campofrio except that as a big shareholder this is something we applaud and they've been pushing forward for sometime. And we applaud the decision they have made. I think it's positive for our ownership and is positive for the whole relationship.

Bo Manly

I know there have been a number of questions about the Campofrio plan and as what is said we're not going to comment on another public companies specifics and details. However, they did have an Investor Day, a program that they put on this last Monday that may be you can probably find it on their website. But we will try to make that available on our website before the end of the day. So if anybody wants to take a look at what they told their financial community in Europe, we'll make it available to you.

Operator

Next we go to line of Ann Gurkin.

Ann Gurkin - Davenport & Company

I wanted a follow-up and a comment in your release about delivering a second to deliver consistently thorough results for fiscal '13. Does that mean, what's underlined that statement do you expect to hit your target by segments in fiscal '13? Can you help me understand what's the putting of that statement?

Larry Pope

I'm speaking more about the fundamentals. The fundamentals in the industry are so good both exports and the hog production side of the business. The fundamentals are rare. So I think within context of the fundamentals.

Bo Manly

Ann, as I mentioned earlier we go through a budgeting process for the next fiscal year at the beginning of the fourth quarter. So we're just getting into that. But I don't see anything out there, as Larry says, from a fundamental perspective that shouldn't allow us to generally deliver our normalized margins in all of our segments next year.

Larry Pope

And I think the relationship we have with customers and packaged meats focus has that we have done extremely well and in environ where raw material is much higher. So I will say it again, the fundamentals in what we're doing seem pretty good to me.

Operator

Next we go to line Ken Zaslow.

Ken Zaslow - BMO Capital Markets

Can you tell a little bit more about has anything structurally changed in the international business that we could gain a little bit more confidence that in 2013 you guys are on your way to actually hit a normalize or even higher than given what's happening in the third quarter. Can you just talk to that point about the international business? And is it just that the fundamentals in the industry or is it that you guys are doing something about that little bit just that we can get a little bit more confident and say, look your numbers for 2013 are more renewable?.

Larry Pope

And let me make two real quick comments then Bo can add anything that he want. So changing Campofrio, let's see have they made a positive. So that's positive for that business. Number two, we got an export license in Romania, where we've been struggling with that business since we made these investments. So those two countries are positive with Mexico is fine then Poland is fine. And I don't see any growth in live production supply to speak over Europe, which should bode well for the mild production side of business.

Bo Manly

I think you can look at almost every segment of our businesses that we had. We started in various fundamental areas as Larry, pointed out. The future's market, the future strip is very, very friendly to hog production as we look out through the balance of calendar 2012. If you look at the fresh pork side and the export side, Europe is going to be down somewhere and their fresh pork supply is somewhere between 1% to 2% as we look at the next six, nine, 12 months. That bodes very, very well for us in the export markets because frankly Europe is our major competitor there. So if they're not as active because of short supplies that will create opportunities for us. And on the packaged meat side?

Ken Zaslow - BMO Capital Markets

Please ask him about international?

Bo Manly

Why do we feel the way we do about the whole segment. I think that you're going to start to see greater traction coming to bear from our marketing efforts and our promotional spend that we've increased this year significantly over the last year. So I think that there are positive elements affecting the fundamentals in every part of our business looking forward.

Operator

And next we go to the line of Ken Goldman.

Ken Goldman - JPMorgan

Bo, you've commented recently at a conference about Sara Lee's meat business. And I think if I am reading the transcript, right, you mentioned, you might take a look at it if and when it comes for sale. But you do seem to think it's going to corner a lot of interest.

Can you add a bit of color to that, not necessarily regarding Sara Lee directly although that will be welcomed obviously? But really, how you see your desire, I guess to add rents via acquisitions right now? And I think for couple reasons, not only because acquisition is always being of interest, but also you're announcing a higher advertising, higher CapEx on brands, I think some additional R&D spending today and maybe that suggest you're comfortable with the brands you have now as platforms of which to innovate in market. So maybe you don't need an acquisition if that's the case, I'm just curious how you're kind of thinking about that balance today?

Larry Pope

I will make a comment then Bo will respond his comment. We do not talk at a conference but I do have a lot of confidence in our brands. I do think we've made changes in the equity of our brands, in the strength of these brands. We are building all those brands. We are not assuming that we have to have an acquisition in order to grow this business. I'm not assuming that. And so I'm going to that as a base comment and you are build on that. Bo, I don't know whether what you said to them about Sara Lee, so I'll have to refer that question to you.

Bo Manly

Well I said that, I can't go for a more than about three days of the time before I don't have a major New York investment bank or other bank come to us saying, "Boy, we'd love to represent you in this early acquisition". So I think that to some degree the comments I made were reflective but not necessarily our activities but the activities of people in the community in New York.

So I can't believe that once it goes on the block then we're not going to have everybody in the world trying to sell us Sara Lee. I don't think it's necessary. We're going to have to go to the table. I think table will come to us. So everybody is going to look at. There many people out there that might have a grater interest in it then we do. It does fit in the brand portfolio, because we don't have a lot of branded breakfast sausage that we'd compete directly with Sara Lee. So it is compatible in that regard.

But in terms of acquisitions, we grew as an acquisitive company through the 80s and through the 90s. But back three years ago we unplug the phones far as acquisitions were concerned. And it wasn't a practical thing. We're now answering the phones, but frankly good value is hard to find by sat this point.

Operator

Next we go to the line of Tim Ramey.

Tim Ramey - D. A. Davidson & Company

Larry, you mentioned tariffs are coming down and I don't know whether you're referring to stuff that's already announced or stuff that you see moving in the right direction from a trade talk perspective, can you elaborate on that?

Larry Pope

Tim, I was really relating to the free trade agreement that have just been signed and as well we are sitting in some other countries where there is a lot of discussion. And even in Japan, there is a discussion going on for this trans-pacific partnership discussions about whether there will be a change in the whole gate price system for Japan. There are significant tariffs between here and China that would say Chinese move towards more imported products. I think there will continue to be pressure on that front if they want to solve their deficit problem. The discussions around tariffs will continue to build. So I think that's a positive from that standpoint.

There is nothing firm on that front except just the generalized pressure. There is a generalized trend towards more free trade in the world. And pork is certainly one of those items in Asia that is the center of the conversation. So I think the whole move is coming in our direction.

Bo Manly

I'd also comment that there is two areas of the world in terms of our ability to arbitrage the areas like China that really don't access to, and that's one from Romania and Mexico, both of which do not have access to China. And we've been working with the various agencies in those governments to try to open those up.

Typically, they've come at frankly more beneficial tariff relationships than what we've had for United States. Mexico and Romania are both very, very friendly countries towards China and probably have a different structure than what we have. So I think it'll be very beneficial once we get those markets opened up.

Operator

Next we go to the line of Robert Moskow.

Robert Moskow - Credit Suisse

You mentioned that the export license for Romania. Can you help me understand are you producing at a low enough cost now in Romania to be competitive in the Western European market and is the quality good enough? And then secondly, you also talked about evolving the exports into a trade channel rather than opportunistic. And I wanted to get a little bit more color, Larry, on the investment that you're making into people relationships. You talked about the integration of the organization that's being a benefit there. I think you're kind of referring to Farmland. I think historically you had very good relationships in Japan. Can you talk a little bit more about what investment you're making to make that into a trade channel?

Larry Pope

We are investing in people. And that means putting people in two countries to build those relationships. A couple of years ago, we put John Morrell, Farmland and Smithfield all three international sales organizations together and put those working cooperatively and together in terms of their emphasis and change they can have on the market, and that's been extremely important. Plus we've taken the assets they had the relationships, not just Farmland, but the Morrell relationship and the Smithfield relationship and have built upon those.

We are people on the ground now in such places as Australia. We've made enormous inroads into Canada, which is a country you don't think about very much on the packaged meat side of the business. We're becoming a force in packaged meat in a foreign country and with U.S. products. That's not just taking a sale because of the customers there. That's building a branded program around that. We have programs in Japan. And we're expanding upon that as we go into China with programs that we could build upon with real people, not just deal traders.

And the final piece of that that's got lots of potential if we could make it work is to deliver fresh pork into Beijing and Shanghai. We as a company can do that. We do it everyday into Tokyo. We can deliver chilled porks, frozen that sell at a substantial premium to the frozen market. And we have the ability to do that. We are testing that to see if that can work.

It may not. It may take time. But it's important to have a relationship with the government. We have excellent relationships with the government officials. That sets us up to build from that others in the rest of the world can't compete with. Europe can't ship chilled pork to China. Only the United States and Canada can really do that. And we've got the product and we got the systems to put huge shelf-life on that product that allows us to access the market no one else can access. But we have to build the relationship through the customer to do that.

So I hope that helps you. And we're going to continue to invest in people and programs in those foreign countries to make it sustainable.

Bo Manly

And those of you who followed the history of the company and know a little bit about what's going on there, we had a very difficult time about five years ago from a health perspective. And it's very pleasing to say that is all behind us and the performance of our herd in Romania is excellent, some of the best performance anywhere in the world for us.

It also has the cheapest source of grain. So all of the fundamentals that we went to Romania to try to implement are still there. They are still available to us. But on the marketing side, for example, the Romanians, like folks in Western Europe and United States, don't eat all of the four products that they might in Asia. And we know just in the prices that we get in China today from the United States are half of rate and make a similar equation from Romania. There is close to $6 to $8 per head hiccup just in all pork component alone at being able to access that market.

Hungary has a higher market by probably $0.10 a pound than what's in Romania. So there is some tremendous opportunities and we are competitive there.

Larry Pope

Folks, I think we're out of time. We don't like to put you up missing your next conference call. It's a minute or so after 10 o'clock. I'll tell you we look forward to the fourth quarter and into fiscal 2013. The fundamentals look very favorable for us and the long-term trend is positive. We'll have ups and downs in the quarter, but I think this company continues to migrate in the right direction.

Thank you for your interest and thank you for being available this morning. Have a good day.

Operator

Ladies and gentlemen, this conference will be able after 10:00 AM today through March 22, 2012 at midnight. You may access the AT&T replay system at anytime by dialing 1800-475-6701 and entering the access code of 237979. International dialers may dial 1320-365-3844. Once again, those numbers are 1800-475-6701. International parties may dial 1320-365-3844 with access code of 237979.

This will conclude our conference for today. We thank you for your participation. You may now disconnect.

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