Smithfield Foods F1Q08 (Qtr End 7/29/07) Earnings Call Transcript

Aug.23.07 | About: Smithfield Foods (SFD)
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Smithfield Foods, Inc. (NYSE:SFD)

F1Q08 Earnings Call

August 23, 2007, 9:00 AM ET

Executives

Jerry Hostetter - VP, IR and Corporate Communications

C. Larry Pope - President and CEO

Carey J. Dubois - VP and CFO

Richard J.M. Poulson - EVP and Director, Mergers and Acquisitions and Government Affairs

Joseph W. Luter, III - Chairman

Analysts

Jonathan Feeney - Wachovia Securities

Reza Vahabzadeh - Lehman Brothers

Christine McCracken - Cleveland Research Company

Timothy Ramey - D. A. Davidson

Eric Katzman - Deutsche Bank

Pablo Zuanic - JP Morgan

Kenneth Zaslow - BMO Capital Markets

Edgar Roesch - Banc of America Securities, LLC

Oliver Wood - Stifel Nicolaus & Company, Inc.

Ann Gurkin - Davenport & Co

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Smithfield Foods First Quarter Conference Call. At this time, all participants are in a listen-only mode. Later there will conduct a question-and-answer session, instructions will be given at that time. [Operator Instructions]. As a reminder, this conference is being recorded.

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

Jerry Hostetter - Vice President, Investor Relations and Corporate Communications

Good morning and welcome to our conference call to discuss Smithfield Foods' fiscal first quarter results.

We'd 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 Smithfield Foods Form 10-K for fiscal 2007.

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

With us today are Carey Dubois, Chief Financial Officer, Dick Poulson, Executive Vice President, Larry Pope, President and Chief Executive Officer and Joe Luter, Chairman. This is Jerry Hostetter, Head of Investor Relations.

Larry Pope will begin our presentation with a review of operations. Larry?

C. Larry Pope - President and Chief Executive Officer

Thank you very much, Jerry and good morning, ladies and gentlemen, and thank you for joining.

I am pleased to report this morning our first quarter earnings. Income from continuing operations of $62 million or $0.47 a share compared with $39.9 million or $0.36 a share in the same quarter last year.

You will note that we are disclosing some discontinued operations in the first quarter of both this year and last year at $7.5 million or $0.06 of share this year and $15.3 million or $0.14 in last year’s for net income of $54.5 million and… versus $24.6 million and $0.41 versus $0.22. The discontinued operations, I think are very well spelled out in the press release. So I will take question on that if you would like during the question-and-answer period, but at this point I will move on and talk about the income from continuing operations.

As you look at these numbers, several things you should be aware of. This year’s first quarter includes three acquisitions that were not in the first quarter of last year. Most recently, the Premium Standard Farms acquisition that was completed early in May of this year, and represents most of the quarter, about 12 weeks we have the Premium Standard Farms both farming operations and the meat processing operations.

In addition, we have the Armour-Eckrich business and the Butterball business that we acquired last October, full quarter of that is in our food processing numbers in the others segment.

And finally, the joint venture we put together with Oaktree Capital Management, Groupe Smithfield involving Western Europe, that is now in for nearly a year. In fact we just completed our first year of the joint venture, and I'll talk about that being very successful, we're very, very pleased with that.

I am pleased to say that both the Groupe Smithfield acquisition and the Armour-Eckrich acquisition and Butterball businesses have been accretive. Those were very nice acquisitions for this company. They have fit in very, very nicely into this, both in Western Europe and complementing what we had. The Armour-Eckrich business under the Morrell oversight, not necessarily combined, has done extremely well. And changing of our Carolina turkey business to the Butterball, carrying the Butterball brand and the Butterball company name has been a strong success for us. And I think the earnings that we're showing here are demonstrative of that point.

What is very pleasing to me, as I look down the various segments of the business, is all of the segments, if you look from pork to beef to international to hog production and then other which is essentially turkey, every one of those segments is up very nicely from the same quarter last year. So we have made progress on virtually every front in this business.

In the pork segment, the fresh meat business has not been good. The first quarter is generally not good for fresh meat. It has not been good for us. The addition of Premium Standard Farms into the fold, adds more… larger fresh meat complement to our business. And when the earnings are not good on the fresh meat side, that will be multiplied, as a result of the PSF inclusion. So, the fresh pork business was not good for us, and I have even seen other earnings from others who have shown some positives. And I am a little surprised, our fresh meat business has suffered and it is worse than last year.

On the other side, the offsetting impact of that is our processed meats business, that is extremely good and it more than offset any downturn in the fresh pork business with the upturn in the processed meats. We have a 26% increase in our total processed meats volume, that’s spelled out in the press release. Even absent the Armour-Eckrich business, we still have a small increase in our processed meats business.

We have significant growth in many of the categories that I have been talking about now for many quarters in terms of the fully cooked and more further processed categories. We have made very nice progress in those, those are nice margin categories for us. As well, I have been talking to you now for more than a year about the fact that the company is a net buyer of hams and bellies. And even with the inclusion of Premium Standard Farms, which does not have much in the way of processed meats, we are still a net buyer of hams and bellies on a week-in week-out basis and a significant buyer. That gives us a great deal of latitude in the way in which run our operations. We are not chasing low margin, overhead coverage processed meats business. We are rationalizing this business through our plants, through several plant closings that we have had and we are walking away from business that does not make sense to us as simply a coverage of overhead. That is showing up, in terms of the margins on these processed meats. And I am extremely pleased with the continuing… the continuing effort that we made there and the success that we are achieving on that end of the business. Our pre-cooked categories are just doing exceptionally well for us and I am very pleased with that end of the business. That’s where I spend a great deal of my time and I think it's showing up.

The beef side of the business is comparatively again strong, in spite of the fact that we have cattle losses; raising losses on the cattle feeding side of the business, we do have losses. Our beef business, as the industry has seen improvement in beef, ours has improved… I think we have been showing very favorably compared to the competition now for quite a long time. And even though cattle is higher, those cost increases have been passed on and the box meat [ph] complex rewarding us with a margin and we're very satisfied with the beef side. I think we do have points of difference on the beef business, and I think that side of business is very solid for us.

On the international side of the business, I spoke for just a second. The Groupe Smithfield joint venture we put together has just done exceptionally well. It’s running very, very good for us. We are now one year into this and I couldn’t be more pleased. Poland has turned very solidly. It's still not where it needs to be, but it's significantly better than it was. You probably have read… you probably have read that we do have a problem on our farms in Romania. Just a couple of weeks ago, we announced an outbreak of classical swine fever on two of our farms. Just this week we got confirmation of an outbreak on the third farm. And we are… this is troubling to us. We have dispatched a number of executives; many people are on the ground. I think we are managing this as best we can. We are in a country where it is pervasive throughout the countryside. We didn’t bring the classical swine fever to Romania, it was already there. The bio-security issues in that country have got to be extraordinary tight. And even in that, you run a risk that something could happen.

I think it is… we indicated in an earlier release that we felt the impact in terms of inventory write downs will be $4 million to $5 million. I expect that number to be somewhat higher, although not something that’s terribly objectionable. It does represent a setback for us. It will slow us down. We were moving at a very fast pace in Romania, I've mentioned that a number of times. We will have to slowdown as a result of this and change some of the ways in which these farms are run and operated and are going to have to stop some of our growth, for probably the next 12 months, as we deal with this.

But I don’t want to overstate this. It is certainly taking a lot of our management time, we deal with these issues. I think from an overall standpoint of Smithfield Foods, it's in the manageable category and it's certainly not threatening to the business in any kind of serious way.

On hog production side of the business, we are showing an improvement, it's only a modest improvement of $4 million or $5 million. Raising costs, as we outlined in the press release, are up fairly significantly. Live hog prices have moved up as well. The full impact of the corn earlier in the year is now showing in the marketing of the animals to the plant. So we are seeing the full impact of that higher priced corn earlier in the year; that’s now coming through in the selling of the animals into the plant. So, those show up as substantially higher raising cost.

We have mentioned a number of times in the past that we put commodity hedging positions in place, and those have been successful in moderating some of these cost increases, and so those have helped to offset what are the cash raising cost by allowing those costs to be offset through commodity, through commodity hedges. You all know that we do this very regularly and routinely. We are significantly hedged far out, particularly on the grains side of the business. And so, the result of that is that our hog production operations, again we do have the Premium Standard Farms numbers in there, and they were profitable for the quarter. So they helped those numbers modestly. But all of our activities there and helped us to maintain the profitability on the hog production side of the business.

So from my standpoint, it's rewarding to see that all segments of the business are performing better than they did last year. The fact that the processed meat side of the business is going as well as it is, is very gratifying to me. I think that is sustainable and something that we have been working on for some time. Admittedly, last year’s numbers were not where they need to be. So the comparison for last year's quarter is not something I am terribly pleased with, and it shouldn’t be a difficult comparison, because I think the earnings last year were not what they should have been. But we have made a lot of progress in a lot of areas, and I think it's showing up to you, particularly the concerns some of you had on the international side of the business, the turkey side of the business, the hog productions continue to be very profitable in this processed meat side. So, those are significant comparisons from the company’s standpoint, and I think they show the strength and the diversity of the earnings [technical difficulty] task.

Well, I'll speak to you about where I think we are, going forward. I am going to turn it over to Carey Dubois and let him go through some of his financial report here, and then Carey, you can pass it back to me for a future, a look forward. Carey?

Carey J. Dubois - Vice President and Chief Financial Officer

Thank you, Larry. Before I begin with the financial review, I would like to firstly brief the analysts and investors on this call. I look forward to meeting many of you in the months ahead. I was quite excited at the opportunities facing Smithfield when I joined the company 2.5 years ago. I am even more excited with them today. I also wish to thank Larry and the board for their confidence and support for this opportunity in taking the finance team forward.

Turning our attention to the first quarter financials, I wish to reiterate several points that Larry just made. There are several new entities whose results have flowed through the first quarter financials. Those include Premium Standard Farms, the Groupe Smithfield joint venture, the Butterball business and the Armour-Eckrich business. And this is in comparison to the last year’s first quarter.

Now in am speaking about last year’s first quarter, it is important to point out that those results included the numbers for Jean Caby, a French business that was contributed into the Groupe Smithfield business. Last year results at Jean Caby were consolidated into our results. This year, the results are included using the equity method of accounting along with the rest of the Groupe Smithfield.

Beginning with the income statement, sales for the quarter were $3.4 billion or 21.5% higher than the $2.8 billion for the first quarter last year. Sales were up across most of businesses of pork, hog production, and beef segments, with the two former segments benefiting largely from the incremental volume from the Armour-Eckrich and Premium Standard Farms acquisitions. Sales of our international segment would also have been higher for the quarter, if last year’s first quarter results excluded the $93 million in sales related to our Jean Caby business.

Selling, general and administrative expenses were up $8 million or 5% over the same period last year. The increase in SG&A from the acquisitions was partially offset by positive currency translation gains, and due to the fact that we are no longer including the expenses of Jean Caby.

Operating profit was a $147 million, up 48% from the $99 million a year ago. We experienced improved earnings across all segments, due largely to our acquisition activity and to improved margins in our pork and beef segments. Adding back depreciation and amortization of $69 million, our earnings before interest, taxes, depreciation and amortization was $216 million this quarter versus a $164 million last year, a 32% increase. Our trailing 12 months basis EBITDA was $725 million versus last year’s trailing 12 months number of $654 million.

Interest expense rose 29% or $12 million over the same quarter last year. The increase was largely driven by an increase in our overall debt of $710 million over the past year. This capital was used primarily for financing activity related to Armour-Eckrich, Premium Standard Farms and Groupe Smithfield transactions, as well as for further investments and higher working capital needs in Poland, Romania and North Carolina.

There are two other noteworthy points relating to the income statement. First, and were also noted by Larry, our Smithfield Bioenergy operations were placed into discontinued operations in the fourth quarter of fiscal 2007, with the anticipation that these assets would be sold as a single unit. After further effort in the disposal process, we now believe it is unlikely we can dispose off them in a single transaction. Accordingly, we bifurcated the assets for accounting purposes, and are taking an immediate after-tax impairment of $6.7 million in our discontinued operations on certain bio-methanol assets. At this time, we anticipate a gain when the remaining assets were sold.

Second, you will notice that we added a table to the press release separately breaking out the results for three of our major joint ventures, which are currently included in the results of equity and income for a loss of affiliates. This enhancement should provide you with great transparency and understanding and evaluating the earnings contribution from our investments in Butterball, Five Rivers Ranch Cattle Feeding and Groupe Smithfield. The table showed that our equity method investments contributed to a $25 million quarter-over-quarter improvement to operating profits.

In reviewing the table, and corresponding line item on the income statement, I wish to note that the income is actually reflected as a negative number and that loss is shown as a positive number, in order for the results to tie into the format of the income statement.

Now taking a look at the balance sheet and cash flow statement. Capital expenditures for the quarter were $109 million, as compared to our depreciation of $68 million.

In terms of our debt, our overall debt level increased by approximately $320 million in the quarter to $3.4 billion. The borrowings were used to finance a portion of the Premium Standard Farms transaction, investment in Poland and Romania and increases in working capital. The Premium Standard Farms acquisition was largely financed with company stock, thereby increasing our expanding common shares by almost 22 million shares. This has led to an increase in shareholders' equity by approximately $635 million over the quarter, which improve our debt-to-total capitalization ratio from 58% to 54%.

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

With that I will turn it back over to Larry.

Larry C. Pope - Chief Executive Officer

Thank you, Carey. That was a nice report. Looking forward, one comment I'd make is, Carey reiterated a point that the outstanding shares that we’ve got, these earnings and the earnings per share which I’m pleased with, reflect this additional 20% dilution on the shares. So we’ve got these increased earnings per share, even with this 20% increase in the number of shares. And so I’m just saying that as a further note to take note of.

Looking forward, we have not been pleased with the fresh pork numbers. And in fact last year in our fall and winter season, I was not pleased with fresh meats results even then. But I think I do expect traditionally as we move into the cooler months and people go back to traditional eating, demand… the demand for these products and fresh pork moves up significantly. I do expect some improvement in fresh pork. Looks like we’re going to have a good fall season in terms of ham, holiday season, I think that’s going to be solid.

On the cattle feeding side of the business, which has not been one of our stars, and we've continued to lose money for some time now, that is an improving situation. So, even in this quarter our losses in cattle feeding were down significantly from last year's first quarter. I expect the cattle feeding losses to continue to decline. Whether we’ll see those… I believe they’ll be fully profitable for the year. But at this point we’re in a loss situation. I think cattle feeding is improving. I think the international business, exclusive of Romania is solid. I expect continued good results in Groupe Smithfield, good results in Romania and Mexico and Spain. And Romania will probably be a bit of a drag and will probably be reporting earning… reporting losses on that for the next several quarters. I expect… although I expect all those to be in the moderate category.

Hog production, if the future’s any indication, and we’ve got north of $50 hogs and in fact hogs seem to go… hogs are getting higher, the further out you look. My raising costs are going to be under $50. The hog market is above $50, so I think, if these markets are anywhere near right. Corn is moderated from the $4 level back into the $3.50, $3.60, $3.70 level. So corn is not going to be… our corn costs are not going to be reflective of $4 corn, going forward. So hog production we’ve been on a long run here where hog production’s been helping drive the earnings of this company. And it looks like it's there for the next six or nine months. It will continue to be there.

So absent the Romanian situation, I think that most of the pointers look positive here and I look forward to pretty good numbers here for the next several quarters. And I expect we’ll have a very solid full year.

With that being said Jerry, I’ll be very glad to take questions.

Jerry Hostetter - Vice President, Investor Relations and Corporate Communications

Okay. Greg, can we open up the lines for question and answer, please?

Question and Answer

Operator

Okay. [Operator’s instructions]

The first question comes from the line of Jonathan Feeney from Wachovia. Please go ahead.

Jonathan Feeney – Wachovia Securities

Thank you very much, good morning.

C. Larry Pope - President and Chief Executive Officer

Good morning.

Jonathan Feeney – Wachovia Securities

Larry, I want to follow up on something you said as part of… you talked about raising costs being beneath $50. That sounded like you had some reasonable confidence in that for the current quarter in coming. So I guess, is that a statement based on some of the corn hedging or forward buying that you’ve already done about or is that just sort of a guesstimate as to where the market cost to corn will be?

C. Larry Pope - President and Chief Executive Officer

Jonathan, I would tell you, this would be a repeater. I’m not going to give you our hedging positions and I’ll stick to that.

Jonathan Feeney – Wachovia Securities

You can’t fault a guy trying, though.

C. Larry Pope - President and Chief Executive Officer

I know. But I'll point to that… but I’m still going to answer your question, I think. We routinely are significantly hedged forward on corn. And so you take that statement however you like. Bottom line, I’m pretty darn confident our costs are going to under $50 provided the pigs live. The risk I've got is if the pigs don’t live. But absent that, I think we’re going to be… I think we’ll be under $50.

Jonathan Feeney – Wachovia Securities

We all have risks. Just one follow up then, Larry. You may not have this number in handy, and if so, we can follow up offline. But if you took what I see as spot corn prices of about $3.50 average daily price for the quarter, and you had to buy on the spot market at that price, would that be close to a $49 breakeven?

C. Larry Pope - President and Chief Executive Officer

I think Jonathan it would even be below that.

Jonathan Feeney – Wachovia Securities

Really? Okay.

C. Larry Pope - President and Chief Executive Officer

All right?

Jonathan Feeney – Wachovia Securities

Thank you very much.

Operator

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

Reza Vahabzadeh – Lehman Brothers

Good morning.

C. Larry Pope - President and Chief Executive Officer

Good morning, Reza.

Reza Vahabzadeh – Lehman Brothers

Just on the exports front, the exports have been slowing this year and off in the last couple of months. And then inventories are up a little bit for frozen pork. Can you comment on that, on how we should think about that?

C. Larry Pope - President and Chief Executive Officer

Well, I think the exports have been down Reza, in the Mexican market, and the industries had lower exports; our exports have actually been up a little bit. We don’t have much, most of it is hams going… the Mexican market has a lot of hams. We don’t have a lot of exports into Mexico because we don’t have a lot of hams. And what we do have, we send to Western Europe and to our European operations. But our exports have been solid on the Japanese front and then to Russia. So, our exports are up a bit. And even what you’re seeing in some of these reported exports, I think beef… if you take the cold storage reports, it said beef was down and chicken was down and pork was up about 10%. A lot of that is hams in the freezer, and we are part of that issue. It's people who put hams down for the fall holiday season as we’ve done. We didn’t do much of that last year. We had a different arrangement in terms of our hedge position last year, relative to hams. We didn’t take that this year and in fact put the physical hams in the freezer in order to protect our sales from a market standpoint.

So I think a lot of that… in fact, I believe in July ham report, and I thought I saw them in the last day or so, was the highest level of hams ever reported in July in the cold storage. And we are a part of that; we are a significant part of that. So I think you’re going to see a near term growth there, and then those hams are going to come out. As we go in to the fall season they’re going to come out. And so I think that’s what's driving the inventory levels and that’s where our exports stand.

Reza Vahabzadeh – Lehman Brothers

But does that exacerbate your concerns around the fresh pork margins and cutout values in general?

C. Larry Pope - President and Chief Executive Officer

No, not really. Because the freezer stock growth is hams that are there for the processed meats part for the business, for the smoked ham business for the fall. So it's independent of the fresh meat. Although I guess the other piece of that would be, hams are relatively cheap this year. And I don’t know that I think hams are going to go… I think they’ll clearly go up as we get into the fall. I originally thought, several months ago that hams will reach a pretty high level. I’m not sure that hams are going to run away from us. So that could hold back the cutout a little bit on the ham side this fall.

Reza Vahabzadeh – Lehman Brothers

Fair enough. And then a housekeeping question for Carey. Carey, do you happen to have the revenue from the acquisitions in this quarter or even revenue growth percentage from acquisitions?

C. Larry Pope - President and Chief Executive Officer

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

Reza Vahabzadeh – Lehman Brothers

Sounds good, thank you.

Operator

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

Christine McCracken – Cleveland Research Company

Good morning.

C. Larry Pope - President and Chief Executive Officer

Good morning Christine.

Christine McCracken – Cleveland Research Company

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

C. Larry Pope - President and Chief Executive Officer

Well, Christine, on the first, let me solve one thing in saying that the shortfall [ph] items and some of those are up for everybody, and I think the shortage… the problem in China and we’re getting more intelligent everyday, I think there is a very real problem in China and I won’t speak to some if what’s coming out of there from the government authorities. But some of that information is certainly questionable from my standpoint. And I believe they have a very severe problem. And it's just my opinion here. And I've talked to a number of people. I believe the problem could be as severe as 20% of their whole production. And given that they've got a 500 million hogs produced annually that could be a 100 million hogs shortage. And that’s as large as the whole US production. And so their problem could be our whole production, which means if they have to solve even a part of that, it could be enormous.

With that being said, we have, I know it's been rumored in the press and the trade information about the fact that Smithfield has been having conversation. I can report to you today that we have been having substantial conversation with a very large, a very large Chinese trading company, in fact it's the company COFCO, and those who know the industry know who they are. They are very large trader, not particularly meat traders, but they have been given a mandate from the Chinese government. And we have been having very substantial conversation with them about some sizable shipments, even this fall and winter into China. We do not have a deal as of this telephone call, but I can tell you that we have had very substantial conversations and they are ongoing as we speak. And so, I can’t commit to you that something's going to happen, but I can commit to you that there are some bases for the rumors and we are actively working this issue. I know that it doesn’t fully answer your question, but that’s where we are.

Christine McCracken – Cleveland Research Company

Oh, this is as much as I can probably go on at this point. Just a follow-up then, there has clearly been a few plans you listed here tied to this ractopamine issues and I am wondering is this in your view, kind of political negotiations to some extent or is it pushback on the melamine issues, or if you could comment on that or if you are in fact trying to pull your hogs off ractopamine and what that might do to production?

C. Larry Pope - President and Chief Executive Officer

Well as you well know, ractopamine is not permitted into the EU, it is permitted in the United States. Many producers feed what we call Paylene, ractopamine is the same. We are in a position, Christine, to control what we feed. As you know feeding 20 million hogs, we can change the feeding rations very quickly. And most producers only feed ractopamine in the final 30 days of the raising process. So it's very easy to go off… it's very easy to go off Paylene. And the conversations we’ve had with the Chinese trading company is that we would only supply them Paylene free products, and that we are in a position to do. And I think we are in a unique position from that standpoint that we can’t do that, where we can effect that. And in fact, I have already made some changes in our production operations starting 10 days ago, I’ve already started effecting some of those changes 10 days ago to make sure we were in a position to do that. I think, do I think there is a trade issue going on here with the Chinese government? Probably. Certainly they are reacting to all these attacks from the US.

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

Christine McCracken – Cleveland Research Company

All right, well it sounds like you'll work around that thing, thanks.

Operator

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

Timothy Ramey - D. A. Davidson

Good morning, congratulations. Tell me, it must be early in the morning.

Carey J. Dubois - Vice President and Chief Financial Officer

It sure is.

Timothy Ramey - D. A. Davidson

I understand that Wal-Mart is testing a new thin film case-ready product in Alabama, I think. And you guys had kind of stepped back from the case-ready market a ways back. Do you have any thoughts on that, is there any new opportunity for case-ready?

C. Larry Pope - President and Chief Executive Officer

Tim, maybe you’ve got some bad information. You are right. They are testing a different film in Alabama and we are the supplier. We are the ones supplying it. We are the core supplier for the Brundidge, Alabama. DC, that is testing this new film, I am not at liberty; I think, we are very comfortable, I know the who the beef supplier is, we are not the beef supplier. But we are the pork supplier, and in fact I was at Wal-Mart 48 hours ago on this exact issue. I think we are being very supportive of them and we are one of… the only packer who said we could make the changes. We made the changes in our operation and did that.

Now, with that being said, we have some concerns about that packaging and we have expressed those concerns to them very clearly. I think it's controversial. I think they understand. I was with Pam Cohen who is their Senior Vice President again, just this week, and they are evaluating that. I mean, I think Wal-Mart wants to see their fresh meat business grow. We are supportive of helping them to grow their fresh meat business. We are a partner with them and we are very actively involved in this thing.

So maybe that… no, we haven’t stepped back from case-ready, not at all. In fact I think you might get a different story if you give Wal-Mart a call.

Timothy Ramey - D. A. Davidson

What are your concerns about the packaging, if you may?

C. Larry Pope - President and Chief Executive Officer

Well, the product is safe. This issue of what they call Tri Gas and what you and I… it's had a very small part, a very small portion of this gas has carbon monoxide, it's 0.4% of the gas is carbon monoxide, that’s controversial with consumers. It's safe, there is no risk to it, and so it dissipates, but I think it has public perception problems with it. And but there is not, I don’t think there is any safety issue there at all. And so we have just talked to them about some alternative that we believe we could deliver to them, the same solution they want, which is Overwrap, they want to be in the Overwrap, similar to, what I call the guy next door. They want to compare their product exactly to the guy next door. And I think we can do that without that type of, without that gas being added and we have explained that to them and they are evaluating that. So, I think they are evaluating it very seriously, as a result of our session there this week.

Timothy Ramey - D. A. Davidson

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

C. Larry Pope - President and Chief Executive Officer

Well, some retailers like Target have gone that direction. Other retailers, as Albertsons… and what's really Supervalu now, Supervalu and Kroger or Supervalu and Safeway have backed away from it. They've actually gone in the opposite direction. So you have got retailers going two different directions. Target's going one direction, Super-Target's going one direction and Supervalu and Safeway have announced that they have withdrawn the packaging from their retail stores and they are not going to sell it in that format.

So I am telling you, it is controversial. I think it's… I don’t think there is any risk from the food safety standpoint and the USDA has ruled on that and there is no issue there. But it's one of those things that is politically sensitive in the marketplace and we are trying to be sensitive of that to Wal-Mart.

Timothy Ramey - D. A. Davidson

Got it, thank you.

C. Larry Pope - President and Chief Executive Officer

You are welcome.

Operator

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

Eric Katzman - Deutsche Bank

Hi, good morning everybody.

C. Larry Pope - President and Chief Executive Officer

Good morning.

Eric Katzman - Deutsche Bank

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

C. Larry Pope - President and Chief Executive Officer

I certainly don’t know what you mean by other players being irrational. You might want to expand on that comment, but...

Eric Katzman - Deutsche Bank

Well, I mean haven’t you seen like new capacity brought on in the fresh market when… at a time when maybe the market didn’t need it?

C. Larry Pope - President and Chief Executive Officer

Yeah.

Eric Katzman - Deutsche Bank

That’s what I mean by irrational?

C. Larry Pope - President and Chief Executive Officer

Well, I guess I would think, I would hope no one would be stupid enough to build a new pork plant because China has got a disease problem. That would be clearly irrational. But, I don’t… I think I have had this debate with a number of people that this is an opportunity that probably has a window attached to it. I don’t know… I mean, near-term it looks… the near term I think it's longer than we may… at least it's being for trade and the press… I think it's going to be longer than that. I think it's going to last a year or two years. But fundamentally the Chinese people, Chinese government wants to please the Chinese people. So they will work to solve this problem and get these herds back in line and help solve this disease problem. Although it is blue-eared PEARS and PEARS is an issue that doesn’t easily go away, you just have to manage around it. And PEARS is a continuing disease in this country we have everyday in our hog farms. We just have to manage around it.

So, I don’t think that anybody should be… and I have a phrase here what I call, “hooked on heroin.” I don’t think anybody should get hooked on this heroin of these exports. I think that’s a tragically dangerous strategy to say that you are going to build your business based on exports. Those are nice opportunities when they come along. But god knows you shouldn’t build plants and you shouldn’t build capacities to respond to near-term export opportunities or else you just building yourself for a total disaster. We are seeing it again and again and again, whether you are in Canada or whether you are shipping in Brazil and you are shipping to Russia. Those markets are going to get off again and they look good when they are there, but my gosh, they can disappear overnight and it's be just catastrophic. So, I hope the industry does not respond to this in terms of capacity growth.

Eric Katzman - Deutsche Bank

Okay. And then as a follow-up, perhaps you could comment on where is the strategy in beef and the plant, given what JVL coming out of nowhere and buying that Swift asset. Maybe you can just kind of comment on that? And then I will just pass it on.

C. Larry Pope - President and Chief Executive Officer

We announced in the last conference call that we were given the Brazilian buyer and we not being the successful buyer, that we had to evaluate where we were going on the beef side of the business here. We have not made a final decision there. At this point, we have not made the decision to move forward. We do have the land. We do have all the appropriate things in place that we could begin construction on the new beef plant very quickly here. The economics on the beef side of the business are not that strong. Admittedly our numbers are up from last year. But this still, I mean, the beef business is still not a good business. And we are not… at this point, we are not moving forward on that plant. We have not abandoned that, I want to be clear with that. We have not abandoned that strategy, but we have not moved forward and we are contemplating where we are going to go from here. And I promised you guys that we would make a decision in 90 days from the June date. I am not sure I will make that date. But I want you to know that it is very much on our mind and we don’t want to make a mistake here. But by going forward, we don’t want to make a mistake.

I think we look forward five years, think there needs to be a new beef plant, we have got the cattle to supply that. The other side of that is the cost of construction here has gone up pretty dramatically in terms of that plant to… many of you know about construction costs in this country, how much they've risen. It's given us pause to slow down and think this thing through more seriously. And so we are going through the serious evaluation right now. So, at this point we are not going anywhere. And that’s not a good answer for you. But that’s the only answer I have got.

Eric Katzman - Deutsche Bank

That’s helpful. I will pass it on. Thank you.

Operator

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

Pablo Zuanic - JP Morgan

Good morning, everyone.

C. Larry Pope - President and Chief Executive Officer

Good morning, Pablo.

Pablo Zuanic - JP Morgan

Maybe a question for you Larry, or for Joe. I mean would you say that hog futures right now reflect that potential demand from China. Can you… and then on the point of where it has been in the last year or two, where will you see hog prices going if effectively they have grown at least 20% of their production?

C. Larry Pope - President and Chief Executive Officer

Joe, you want to take that one?

Joseph W. Luter, III - Chairman

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

Pablo Zuanic - JP Morgan

But can you quantify that, Joe? I mean, are you talking about another $5, $10 roughly?

Joseph W. Luter, III - Chairman

I think, if you go back and look in the last 100 years when production goes up and down 4%, I think $5 to $6 would be the number, if historical patterns hold true.

Pablo Zuanic - JP Morgan

That’s useful. And then just one mundane question about the quarter, Larry? When I look at the hog production costs, how much of that $49 was circovirus? I mean let’s say without the circovirus what would the raising costs have been? And if you can comment on what your actual corn costs was for the quarter?

C. Larry Pope - President and Chief Executive Officer

Pablo, I don’t want to go to that level of detail except I will tell you I think in previous quarters… previous quarters, Pablo, we have said that we have had the circovirus cost as being something like $1 to $1.25 a 100 weight is where we have been. The thing you should take away from that, it has negatively impacted us. It is reversing. And in July, the number of hogs that we produced on our farms was more than the comparable period last year. So, we have passed the low point and that in fact we are coming back on the other side of that. So, it’s that kind of… I didn’t ask our people to even calculate it for this quarter. But I would… so Pablo, I am just giving you a prior number. If you were to sort of use $1 a 100 weight, I think for the quarter you wouldn’t be too far off.

Pablo Zuanic - JP Morgan

Okay. And, can you just remind us of your remark, a $1 change in the cost of corn what would be the impact on raising costs? I think you told…

C. Larry Pope - President and Chief Executive Officer

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

Joseph W. Luter, III - Chairman

All right. But don’t forget soybeans.

C. Larry Pope - President and Chief Executive Officer

That’s right.

Pablo Zuanic - JP Morgan

Sure, sure. And if I may, one last one, and I'll pass it on. The FX gain on the hog production side, $70 million, we haven’t seen that before, it’s mostly domestic, right. But I mean, I guess you are including there your Polish and Romanian operations. How did that FX gain happen and how should we think of that going forward?

C. Larry Pope - President and Chief Executive Officer

Carey, you want to take that?

Carey J. Dubois - Vice President and Chief Financial Officer

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

Pablo Zuanic - JP Morgan

All right. Thank you.

Operator

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

Kenneth Zaslow - BMO Capital Markets

Hey, good morning everyone.

C. Larry Pope - President and Chief Executive Officer

Good morning.

Kenneth Zaslow - BMO Capital Markets

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

C. Larry Pope - President and Chief Executive Officer

I would say that it has, and I would tell you as I made in my comments that our fresh meat results were actually worse year-over-year. So, the $8 million that you are seeing the increase in pork, more than that come from processed meats, where, had we not had an improvement in processed meats, our pork numbers would have been worse. So, they are consistent. And the other part I would say to you is that they are better. They are better than they have been. They are continuing to improve, just not maintaining, they are continuing to improve.

Now one of the things we always struggle with is we do calculate the numbers separating the fresh pork and the processed meats. We have been very careful to not create any misstatements. Periodically we move, we change the price at which we transfer the product from one section, from the fresh meat business to the processed meats side, which can impact the way in which the profitability shows on our reports. So, I would leave it that our processed meats is delivering all of this… the same as I said to you in the last quarter.

Kenneth Zaslow - BMO Capital Markets

Just continuing on that point, I am not going to ask anymore after this, what would be the volatility around the processed beef business going forward? Or can we assume that somewhere between $30 million to $60 million incremental profit is going to be coming out on a quarterly basis. How does that change looking out further than just a quarter or two though?

C. Larry Pope - President and Chief Executive Officer

Well, clearly processed meats are not as volatile as fresh meat which can change in 24 hours, in 48 hours. I think that am not going to assure you that this is all, that we are not going to have any declines on our processed meats side of the business. Those things can happen. High priced raw materials can change that over time. But I do think that you are going to see a very solid contribution part of the business for the certainly, foreseeable future.

Kenneth Zaslow - BMO Capital Markets

Great. I appreciate it. Thanks.

C. Larry Pope - President and Chief Executive Officer

You’re welcome.

Operator

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

Edgar Roesch – Banc of America Securities, LLC

Good Morning.

C. Larry Pope - President and Chief Executive Officer

Good Morning.

Edgar Roesch – Banc of America Securities, LLC

I was pretty impressed with the level of SG&A spending. It seems like you got some real efficiencies there and certainly as a percentage of sales, one of the lowest levels you've ever reported. Obviously there is some inflation from higher prices on your sales line. But could you just talk about… is it efficiencies from some of these acquisitions that’s driving what seems to be a very efficient rate of spend in there?

Carey J. Dubois - Vice President and Chief Financial Officer

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

C. Larry Pope - President and Chief Executive Officer

On the other side, let me speak to that acquisition part. I think, the fact that we've got Bo Manly working for us as Executive VP and Bo was previously the President of Premium Standards Farms, Bo was responsible for integrating the Premium Standard Farms business into our business. And we did a… I think Bo… he was in charge of that… I think he and the team did a terrific job of integrating that operation. We have essentially dismantled much of the operation of PSF and have eliminated a great deal of G&A costs associated with that acquisition, by putting that into both the Smithfield and the Farmland organizations, and I think that hit the bottom line, I am going to use the word instantly.

The other side of that is that on the Armour-Eckrich business that we bought last October, we’ve done a very good job of running that with the Morrell banner and using some of our existing people. And so, I think there’s been a big effort on that front. So those two have gone into the organization without nearly the complement of SG&A that you would normally expect.

Edgar Roesch – Banc of America Securities, LLC

That’s terrific. And since you mentioned Armour-Eckrich, any chance you would mention the utilization rates that you are starting to run at in this plant?

C. Larry Pope - President and Chief Executive Officer

Well, many of those plants we are changing as we speak. I think I had told you before that we were at about 80% utilization. Now we are striving to get to 90%. I can’t tell you that number in these last three months has changed terribly, and in fact, we are in some of the weaker periods of the year. I think as we go into the fall season, those numbers will move up. And so I think everything there is positive. Let me say that. You've got some seasonalities running through there, we are still at about 80% utilization.

Edgar Roesch – Banc of America Securities, LLC

All right. Thanks very much.

Operator

Your next question comes from the line of Bill Chapell from Sun Trust. Please go ahead.

Unidentified Analyst

Hey, good morning, guys. This is actually Shezad Ali [ph] in for Bill Chapell. I noticed that both the international and the other segments are doing very well and I wanted to give you a chance to expand upon both of those. Let us know how Groupe Smithfield is doing as well as the Butterball JV going into turkey season and seeing as corn has come down a little bit, regarding raising costs and that sort of thing.

C. Larry Pope - President and Chief Executive Officer

Well, I think the numbers speak for themselves. We've bought the Butterball business. I had someone tell me here recently when I was out that they were bothered by the fact that, I'll touch on the side of it [ph], but Larry, you guys bought that Armour-Eckrich Butterball business and that one's going to be a tough one to wrestle to the ground, and I’m sure that’s hurting you guys. And I sort of chuckled as I walked away saying, I wish, I mean, it's one of the better acquisitions we have engineered. The Butterball business combined with our Carolina turkey business is going together extremely nicely. And the numbers show. The other line Carey, I think is essentially the turkey business. And I think there is another company who released earnings this morning indicating that their turkey business was off about 20%. I think if you look at ours, you'll see our turkey business is up very nicely. So we’re doing extremely well on the turkey side of the business.

On the international front, the Groupe Smithfield side, we were losing money. With the Jean Caby business, we were losing money last year this time, and losing significant money, in the order of $1 million a month on a pretax basis. And now we’re making money, even our half is better than the $1 million a month. So with that kind of a turnaround, it was a marriage made in heaven where we were very strong on the manufacturing side and Sara Lee was very strong on the marketing side. We’ve taken both of those to help both businesses and that horse has come out of the gate running hard and continues to perform extremely well.

And I… it's just, I mean, I think I made… you guys made the comment some nearly eight of nine months ago that international wasn’t delivering anything. I told you, hold on it's coming. It has. The only fly in the ointment here is Romania, and Romania was moving forward and we’ve got this setback that just hit us here in the last 30 days, which is a disappointment and a setback, but we’ll deal with it. That’s what we get… that’s what we do everyday and that’s the business we understand. So, judge us on our numbers.

Unidentified Analyst

Sounds good. Thanks a lot. And congrats on a great quarter

C. Larry Pope - President and Chief Executive Officer

Thank you.

Operator

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

Oliver Wood - Stifel Nicolaus & Company, Inc.

Great. Thanks a lot for taking my questions. This is a question for Carey actually, just trying to reconcile the comments in the release also in the prepared comments, that cattle feed operations generated losses versus the breakout of equity in income of affiliates which indicated a $5 million gain. Just trying to figure out what the delta is there.

Carey J. Dubois - Vice President and Chief Financial Officer

Yes, the gain that you see in the table that we’ve provided is for the joint venture that we have with Conti, it's the Five Rivers Ranch cattle feeding operation. Separate and apart from that, our beef group does own and raise some of its own cattle. So I think that point that you’re alluding to that Larry made a mention in terms of some of the losses are in terms of beef feeding may have come from the company owned inventory as opposed to the inventory of the joint venture

C. Larry Pope - President and Chief Executive Officer

And I'll speak to that for just a moment and that would seem inconsistent. These are completely different feeding programs. We’re feeding feed lots, which is primarily native cattle which have a very quick turn. So, you’re buying the feeder cattle, feeding them out a few months and then putting them to market.

Well, we at the Five Rivers joint venture with Conti, what we are doing is feeding Holsteins which take 15 months and you buy very young cattle and you have to hold them for more than a year up to 13, 14 months. And so what happened to us on our old raising style is we bought cattle a year ago when feeder cattle Holsteins were expensive and corn was low and then what we… now what we’re doing is feeding expensive… feeding cattle expensive corn and that ends up being a disaster in the short term. But that‘s all reversing. Now Holstein feeder cattle are selling sharply lower than they were a year ago and we’re going into lower corn with lower cattle. So this thing… that’s why I made the comment earlier, it will be reversing and it should be… this whole thing, given time it all reverses itself. So that’s why the two are inconsistent they have to do. One's a three month time lag and the other one’s a 12 month time lag.

Jerry Hostetter - Vice President, Investor Relations and Corporate Communications

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

Operator

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

Ann Gurkin - Davenport & Co

Good morning.

Carey J. Dubois - Vice President and Chief Financial Officer

Good morning.

Ann Gurkin - Davenport & Co

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

C. Larry Pope - President and Chief Executive Officer

Ann, we’re able to tell you that in Romania the plant as a result of this has been closed for two weeks. And we just opened the plant here this week. The government allowed us to reopen the plant, that was because they've locked out all the farms and we couldn’t move hogs off any farm. Even the farms that worked, and had no problem got locked down. I think we’re looking at a situation, going forward where we are going to be able to put in 10,000 or so, or 12,000…, near-term, this is not going to have quite the impact. We were ramping up to 14,000 and 16,000. We’re running 9,500 this week and we’re running 10,000 next week. So the plant is back up and running and we’re selling the meat again. I think what will happen is you might even see some weeks where we’ll have 14,000. We just won't have the weeks of going to the 18,000 and 20,000 that we thought we were going to. We’ve probably got a setback here of a full one year in terms of the growth of the numbers coming to the plant.

Ann Gurkin - Davenport & Co

Okay, great. And then switching back to the US, can we get an update on retail pricing? Are you getting pricing through with customers and is the timing of pricing in line with your estimates? Or is there any kind of lag?

C. Larry Pope - President and Chief Executive Officer

Well, I think that the fact that we’re… I would tell you on the fresh meats side it's been tough and the fresh meat results demonstrate that. On the processed meats side, I think we’ve done a very good job.

Ann Gurkin - Davenport & Co

Okay. Great. Thanks very much.

C. Larry Pope - President and Chief Executive Officer

Welcome.

Jerry Hostetter - Vice President, Investor Relations and Corporate Communications

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

Operator

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

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