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            SFD - Q1 2009 Smithfield Foods Earnings Conference Call
            Event Date/Time: Aug. 26...
FINAL TRANSCRIPT
 Aug. 26. 2008 / 9:00AM, SFD - Q1 2009 Smithfield Foods Earnings Conference Call

CORPORATE PARTICIPANTS
...
FINAL TRANSCRIPT
 Aug. 26. 2008 / 9:00AM, SFD - Q1 2009 Smithfield Foods Earnings Conference Call

Each quarter, there are...
FINAL TRANSCRIPT
 Aug. 26. 2008 / 9:00AM, SFD - Q1 2009 Smithfield Foods Earnings Conference Call

folks, and in fact, one...
FINAL TRANSCRIPT
 Aug. 26. 2008 / 9:00AM, SFD - Q1 2009 Smithfield Foods Earnings Conference Call

made reference to in la...
FINAL TRANSCRIPT
 Aug. 26. 2008 / 9:00AM, SFD - Q1 2009 Smithfield Foods Earnings Conference Call

Finally, we made a chan...
FINAL TRANSCRIPT
 Aug. 26. 2008 / 9:00AM, SFD - Q1 2009 Smithfield Foods Earnings Conference Call

Our long-term debt and ...
FINAL TRANSCRIPT
 Aug. 26. 2008 / 9:00AM, SFD - Q1 2009 Smithfield Foods Earnings Conference Call


Larry Pope - Smithfiel...
FINAL TRANSCRIPT
 Aug. 26. 2008 / 9:00AM, SFD - Q1 2009 Smithfield Foods Earnings Conference Call

One point that I feel c...
FINAL TRANSCRIPT
 Aug. 26. 2008 / 9:00AM, SFD - Q1 2009 Smithfield Foods Earnings Conference Call

Larry Pope - Smithfield...
FINAL TRANSCRIPT
 Aug. 26. 2008 / 9:00AM, SFD - Q1 2009 Smithfield Foods Earnings Conference Call

Larry Pope - Smithfield...
FINAL TRANSCRIPT
 Aug. 26. 2008 / 9:00AM, SFD - Q1 2009 Smithfield Foods Earnings Conference Call

Bo Manly - Smithfield F...
FINAL TRANSCRIPT
 Aug. 26. 2008 / 9:00AM, SFD - Q1 2009 Smithfield Foods Earnings Conference Call

Larry Pope - Smithfield...
FINAL TRANSCRIPT
 Aug. 26. 2008 / 9:00AM, SFD - Q1 2009 Smithfield Foods Earnings Conference Call

Christine McCracken - C...
FINAL TRANSCRIPT
 Aug. 26. 2008 / 9:00AM, SFD - Q1 2009 Smithfield Foods Earnings Conference Call

Larry Pope - Smithfield...
FINAL TRANSCRIPT
 Aug. 26. 2008 / 9:00AM, SFD - Q1 2009 Smithfield Foods Earnings Conference Call

Reza Vahabzadeh - Lehma...
FINAL TRANSCRIPT
 Aug. 26. 2008 / 9:00AM, SFD - Q1 2009 Smithfield Foods Earnings Conference Call


Bo Manly - Smithfield ...
FINAL TRANSCRIPT
 Aug. 26. 2008 / 9:00AM, SFD - Q1 2009 Smithfield Foods Earnings Conference Call


Operator
Heather Jones...
FINAL TRANSCRIPT
 Aug. 26. 2008 / 9:00AM, SFD - Q1 2009 Smithfield Foods Earnings Conference Call


Larry Pope - Smithfiel...
FINAL TRANSCRIPT
 Aug. 26. 2008 / 9:00AM, SFD - Q1 2009 Smithfield Foods Earnings Conference Call

Bo Manly - Smithfield F...
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smithfield food First Quarter Earnings Transcript2009

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Transcript of "smithfield food First Quarter Earnings Transcript2009"

  1. 1. FINAL TRANSCRIPT SFD - Q1 2009 Smithfield Foods Earnings Conference Call Event Date/Time: Aug. 26. 2008 / 9:00AM ET www.streetevents.com Contact Us © 2008 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.
  2. 2. FINAL TRANSCRIPT Aug. 26. 2008 / 9:00AM, SFD - Q1 2009 Smithfield Foods Earnings Conference Call CORPORATE PARTICIPANTS Jerry Hostetter Smithfield Foods, Inc. - VP IR Larry Pope Smithfield Foods, Inc. - President, CEO Bo Manly Smithfield Foods, Inc. - EVP, CFO CONFERENCE CALL PARTICIPANTS Ken Zaslow BMO Capital Markets - Analyst Ken Goldman JPMorgan - Analyst Jonathan Feeney Wachovia Securities - Analyst Christine McCracken Cleveland Research - Analyst Vincent Andrews Morgan Stanley - Analyst Reza Vahabzadeh Lehman Brothers - Analyst Heather Jones BB&T Capital Markets - Analyst Ann Gurkin Davenport Research - Analyst 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. (Operator Instructions). As a reminder, this conference is being recorded. I would now like to turn the conference over to Jerry Hostetter. Please go ahead. Jerry Hostetter - Smithfield Foods, Inc. - VP IR Good morning. Welcome to the conference call to discuss Smithfield Foods' fiscal 2009 first-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 Smithfield Foods Form 10-K for fiscal year 2008. You can access the 10-K and our press release on our Web site at www.SmithfieldFoods.com. www.streetevents.com Contact Us 1 © 2008 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.
  3. 3. FINAL TRANSCRIPT Aug. 26. 2008 / 9:00AM, SFD - Q1 2009 Smithfield Foods Earnings Conference Call Each quarter, there are several analysts waiting to ask questions, as our calls end after one hour. We would like to provide the opportunity to as many analysts as possible to ask questions. As a courtesy, we request that you ask only one follow-up question so that everyone can participate. With us today are Bo Manly, Chief Financial Officer, and Larry Pope, President and Chief Executive Officer. This is Jerry Hostetter (technical difficulty) of Investor Relations. Larry Pope will begin our presentation with a review of operations. Larry? Larry Pope - Smithfield Foods, Inc. - President, CEO Thank you very much, Jerry. Good morning, ladies and gentlemen. I here this morning to report our results for the first quarter, as Jerry pointed out. We are reporting this morning a loss from continuing operations for the first quarter of $28.5 million, or $0.21 a share, compared with $56.6 million or $0.43 in the same quarter last year. The bottom line is $12.6 million, or a $0.09 share loss on $54.6 million or $0.41 a share in last year. I hope you took opportunity to note that, in the loss from continuing operations, we have a mark-to-market adjustment of $20.1 million or $0.15 a share. It's an unfavorable mark-to-market related to a portion of our hedging -- derivatives activities, as well our interest in Campofrio in Europe. They are taking a charge related to the write-down of some assets in Russia for $5.5 million or $0.04 share pending the sale of that business to a buyer. I'll let Mr. Manly speak more about that in his report. Overall, the business, as many of you know, has been tough. Grain costs have now been elevated for some time, and they are continuing to surface very strongly through our hog production operations in terms of raising costs, and I'll speak about that in a minute. But that is severely impacting our business and is a large factor in terms of where our results are, both this quarter and last quarter. In terms of some of the segments of the business, the fresh pork business has been exceptionally good. We have some substantial increase in volume of more than 30%. As well, we had -- the cutouts have been terrific. Those have been driven by export business which has been extremely good for ourselves and the rest of the industry. As we pointed out in the press release, our exports were up nearly 125%. The carcass values are the highest in the history of the business. Pork is cheap on the world markets, as many of you know. That has fueled some of this export business. While (inaudible) hog prices and the pork cut out in this country is very high, it's even higher in places like Mexico and in Europe. That has made pork look cheap around the world. I think that's going to continue. So the problems that are occurring in terms of the grains, relevant to the markets in this country, are even more severe outside of the United States. All of the protein -- all of the proteins are responding to that. That has turned out to be substantial. We are exporting at record levels; we are exporting every bit as much as the industry, and in many cases more. As I pointed out in our press release, the countries that are -- we're seeing substantial increases like China and Russia and Japan, and the EU, are all -- Korea -- all are seeing big, big numbers in terms of increases over last year. That has worked to our benefit as it has taken product off the domestic market, in spite of the fact of kill levels being up, with exports and now in the 20% range of product being produced in this country. That takes an awful lot of pressure off this domestic market. It has allowed us to deal with these increased costs on the raising side. As many of you know, livestock prices did increase slightly during the quarter but increased fairly significantly towards the end of the quarter. What is very satisfying about that was our ability to pass those prices through and the market has been reacting to that and the cutouts have continued to be black. I'll talk in a minute about our relationship with the COFCO trading company in China. That has been helpful. As many of you know, we have been doing business with that organization now for nearly a year. We've got a good relationship with those www.streetevents.com Contact Us 2 © 2008 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.
  4. 4. FINAL TRANSCRIPT Aug. 26. 2008 / 9:00AM, SFD - Q1 2009 Smithfield Foods Earnings Conference Call folks, and in fact, one of their -- their chairman is coming on as one of our board members to be standing for election even tomorrow. So in the fresh meat side of the business, it has been very good. In fact, this quarter might well have been the best first quarter in fresh meat certainly in a very long time, if not in history. July very likely was the fresh pork month maybe in the history of this industry. Now, to the packaged meats business, that's solid. Our margins are down somewhat, not as much as I thought they might have been. The cuts -- the raw material for those are up very dramatically. Such things as trimmings and hams have risen dramatically over last year. Those are not able to be passed on fully in terms of pricing, but there again, I am pleasantly surprised with our ability to pass on prices through in terms of retail and foodservice business. Our margins in the packaged meats business continued to be solid, as well as we continue to get growth in some of the focused areas that we have been on now for some time. I speak about those all of the time, whether that's the spiral ham business and the cooked rib business, and our precooked business is not up. In fact, it is down just a little bit. But that business is still extremely strong for us. Our packaged meats business continues to be very, very good for this company, and I am pleased with the progress we're making in that area. In terms of the other segments of the business, the international piece in terms of the segments that are being reported in the earnings release show a $5.9 million operating profit compared to $14.9 million. However, that does have the Campofrio adjustment in there of $5.5 million. So you need to think about that as you think about the comparative results of our international operations. Again, that relates to the sale of a portion of a business of Campofrio that they're counting as discontinued operations, and they do have a contract to sell that. Our Western European business is struggling. The grain costs and the high cost of the proteins in terms of the raw materials in the packaged meats, which is really what our Western European business quot;Groupe Smithfieldquot; is, have been stressed. That is very difficult to pass on all of those cost increases when you look at the markets in EU. While we're looking at a $60 hog market in the United States, they're looking at more like a $90 hog market in Western Europe and in Eastern Europe. So the impacts are even more severe and more dramatic in terms of trying to pass on price increases through to the ultimate retailer and consumer. That's tough. The Polish business is tough as they deal with even higher-price raw material. But the Mexico business is not bad. In fact, our Mexican livestock raising operations have not done poorly. I'm pleased with that. In our Romanian business, in spite of that, we're breaking even in our Romanian pork slaughter operations. Even on the fact that we're dealing with things with the problems of classical swine fever from last year, I am pleasantly surprised with that. So again, the fresh meat side of the business all around the world is really doing pretty good. The packaged meats business, which is more resistant to price adjustments, is having more trouble, but surprisingly not as much as I might have thought at this point in time. I just want to make a statement that I am really relatively pleased. In spite of the fact we're reporting a loss for the quarter, I'm relatively pleased with the way in which we're operating this business. Hog production is clearly the big downturn in the business between years, and that has been coming for some time now. The grains that have moved up all of this calendar year are fully baked into our raising costs. As we laid out in the press release, our raising costs for the quarter are s $0.61 a pound, which are very high numbers. We've got $6, in fact $7 corn in some of those numbers. Many of you might ask about where are you from hedging standpoint? Didn't you buy your corn ahead? As you all know, we're marking to market, so many of those adjustments get made in different quarters. I have talked about that in the past, in fact www.streetevents.com Contact Us 3 © 2008 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.
  5. 5. FINAL TRANSCRIPT Aug. 26. 2008 / 9:00AM, SFD - Q1 2009 Smithfield Foods Earnings Conference Call made reference to in last year's January quarter -- that as those grains moved up, our accounting for most of that puts that in a different quarter. So I made the comment then, we will be seeing the full impact of $6 corn now more than $6 corn in this quarter. As you know, corn moved up into the mid-$7 range, and some of that got into this quarter and will be into the next quarter as we feed those into the animals before they ultimately come through in the cost of sales end of the business. So hog production numbers, raising costs were up substantially. Live hog prices were up very modestly for the quarter, although up significantly toward the end of the quarter. As many of you know, live hog prices today are $60 or right at it. I think they were down last night, but they're roughly $60 and are above where they were at the end of July. Two other points I would like to make reference to -- you may have noticed that we went forward with a capital market transaction in early July. We raised $400 million in a convertible note issue. In addition, we issued 7 million shares to COFCO Trading Limited, which is our trading partner in China. We felt like we needed to strengthen the balance sheet. Again, Mr. Manly will speak to that. We felt like we needed to strengthen the balance sheet to ensure the liquidity and to make sure that we had the full balance sheet we needed as we go through these volatile and rising periods of these grain costs. In addition, we've got two new directors standing for election tomorrow at our annual shareholders meeting. I alluded to Mr. Frank Ning, who is the Chairman of COFCO. Frank is coming onto our Board and will add a new dimension. We're looking forward to Frank's input and giving us that international perspective, and an Asian perspective in a country where there is so much opportunity and more than 50% of all of the pork in the world is consumed. Frank brings with him a tremendous experience that -- we plan to have a lot of communication, we're building relationships with that organization, and we think that could be very good for Smithfield Foods. In addition, Dave Nelson, who many of you on this call probably know personally or certainly have heard of, we've asked Dave Nelson to come aboard. He is now with a European hedge fund, Altima Partners. David knows the industry, as most of you know, from his ten years or so with CS First Boston and NatWest before that. We think David brings with him a tremendous wealth of knowledge of the basics of this business, certainly from the US perspective, and he is now building an international knowledge base that we think can add to this Board and add to the management team to help us understand how to navigate these world markets. So, we're excited about two new directors coming on the board. We think it strengthens the overall company and our base from which we can (technical difficulty). We have resources to tap that could help us take this business forward. Finally, I announced some management changes at the beginning of this fiscal quarter. We created a position of the President and Chief Operating Officer of the Pork group. George Richter, who was previously the President of Farmland, has taken over that position and has responsibility today for all of our pork operations domestically. In addition, I created an Executive Vice President position at the corporate level where Joe Luter IV, who was the President of Smithfield Packing Company, one of our subsidiaries, was promoted to Executive Vice President with a concentration on the sales of marketing coordination of the total organization, which is Joe IV's very strong talent. We replaced him with Tim Schellpeper, who was the VP of Operations in Farmland, and Jim Sbarro, who was the Sales and Marketing VP for Farmland, became president of Farmland. So I think, at the operating company level, we created a very strong management team and a young management team. Both Tim, Jim, and Joe Luter IV are all in their early 40s and have a tremendous amount of experience at that young age, and they're all showing that very quickly. I'm very pleased with that. George has a little bit of great hair, and long years of experience I think will mature those -- that group. He is bringing that Pork group together and I think very quickly they're already delivering. As you see, our results on the Pork group are more than 100% above last year. I think there is much much more to come behind that. www.streetevents.com Contact Us 4 © 2008 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.
  6. 6. FINAL TRANSCRIPT Aug. 26. 2008 / 9:00AM, SFD - Q1 2009 Smithfield Foods Earnings Conference Call Finally, we made a change in the Chief Financial Officer's position from Carey Dubois to Bo Manly. Many of you know Bo, both with Smithfield and multiple stays with us as well as his time with Premium Standard Farms. Bo is a very talented individual and I think brings some stability and some maturity to our financial side of the business, an area that I'm very close to over the years. So I think all of that management team together is gelling very well and coming together very quickly. This is not taking big time to make the organizational changes and get people to know each other. These guys are all hitting the ground running, and they're all making substantial improvements to the area in which they're responsible, and I am already seeing it demonstrated in terms of the bottom-line results. So with that, I'll turn it over to Mr. Manly for some comments from his side on the financial side and then I'll give you some forward-looking thoughts. Bo? Bo Manly - Smithfield Foods, Inc. - EVP, CFO Thank you very much, Larry. Good morning, everyone. It's a pleasure to be back with you today. Before I moved into my remarks, let me address one housekeeping item. You may notice our income statement now reflects a separate operating profit line. We decided to show that line separately on the face of our statements to conform our presentation to the format most commonly used by other publicly traded companies. This change in presentation is nothing more than a geography change. We simply dropped interest expense down below the operating profit line. All periods presented conform to this new presentation. Now that housekeeping is out of the way, let me state total earnings for fiscal 2009 first quarter showed a loss of $12.6 million, or a loss of $0.09 per share, compared to a profit of $54.6 million, or a profit of $0.41 per share for the first quarter of fiscal 2008. Earnings from continuing operations for the first quarter totaled a loss of $28.5 million, or a loss of $0.21 per share, compared to income of $56.6 million or $0.43 per share for the same period a year ago. The operations of Smithfield Beef Group have been reclassified as discontinued operations as of this quarter and fiscal 2009. The prior-year statement of income has been adjusted as well to reflect the Beef Group's discontinued status. Income from discontinued operations for fiscal 2009 first quarter total profit of $15.9 million, or net of tax of $0.12 per share, compared to a loss of $2 million or a loss of $0.02 per share compared to the same period a year ago. Dollar sales from continuing operations for fiscal 2009 first quarter totaled $3.1 billion compared to $2.6 billion last year, an increase of 20%. The sales increase for the Pork segment resulted from higher volume and prices for fresh pork. Higher sales for the hog production group were driven by higher live prices for hogs as well as higher volume from improved circle virus health status. Only 12 weeks of PSF sales and earnings were included in the prior year's results, impacting both the Pork segment and hog production group as well. Higher prices for packaged meat in Europe, higher fresh meat volumes year-over-year in Poland and Romania, and consolidation of Agroalim, our Romanian distribution joint venture, all contributed to the 64% increase in international sales segment during this quarter. Selling and general administrative expenses were $190.6 million in the fiscal 2009 first quarter, compared to $165 million the year prior, an increase of 16%, principally due to the year-over-year changes in exchange rates. Currency gains in the first quarter of fiscal 2008 were $26 million versus gains of $10 million in this fiscal year. Without the impact of currency gains, SG&A increased $10 million or 5% year-over-year. Interest expense for the quarter was $44.5 million, $3.1 million more than the same quarter in fiscal 2008. The average interest rate for the quarter was 6.1% compared to 6.8% the same quarter in fiscal 2008. www.streetevents.com Contact Us 5 © 2008 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.
  7. 7. FINAL TRANSCRIPT Aug. 26. 2008 / 9:00AM, SFD - Q1 2009 Smithfield Foods Earnings Conference Call Our long-term debt and capital leases were $4 billion at end of the current quarter, compared to $3.4 billion at the end of the first quarter of fiscal 2008. Depreciation and amortization for the quarter was $68.9 million, compared to $64.7 million last year. The Company has booked constraints on capital spending for the balance of the year. Spending for the first quarter -- excuse me, spending for the year will be less than the full-year depreciation. Capital expenditures for the quarter were $83 million, exceeding depreciation, principally due to a high level of carryover capital expenditures from fiscal 2008. Capital expenditures will be below depreciation in the coming quarters. Let me reiterate. CapEx will be below depreciation for the full year. Farm expansion in Eastern Europe has been throttled back until grain and meat prices achieve profitable equilibrium. Our effective tax rate for fiscal 2009 first quarter was 32% versus 35% in fiscal 2008. For the full year, we expect the effective tax rate to be between 34% and 36%. The Company's debt to EBITDA ratio was approximately 6.1 for the 12-month period ending July 2008, versus 5.8 for the full fiscal year ending in April 2008. The debt-to-capitalization ratio was 56% for the quarter, steady with the debt-to-capitalization ratio for the fiscal 2008. We anticipate that the proceeds of Smithfield Beef Group will be used to reduce debt and these ratios will improve. Smithfield is in compliance with all debt covenants. As Larry mentioned, Smithfield had two Capital Markets transactions during the most recent quarter. During the first week of July, Smithfield issued $400 million of 4% coupon convertible debentures. Simultaneously with this sale, Smithfield sold warrants and bought call options that created a minimum stock conversion price of $30.54 per share. After all fees and costs associated with this transaction, the Company netted $337 million. These proceeds, along with other sources of liquidity, enable the Company to replace $350 million in other short-term liabilities. In addition, during July, Smithfield sold 7 million shares or 4.9% of outstanding shares in a private placement to COFCO for $122 million. We believe this transaction signifies that strategic importance of this long-term relationship with its trading partner. The basic weighted average number of shares outstanding for the first quarter was 135.5 million, up from 132.7 million at end of the first quarter of fiscal 2008, reflecting the COFCO share purchase late in the quarter. Subsequent to our last analyst call, there may have been some degree of confusion about precise levels of liquidity and concerns about available liquidity moving forward. To be clear, available liquidity at end of fiscal 2008 was $314 million. Liquidity at the end of fiscal 2009 first quarter was $504 million, benefiting from cash generated by the stock transaction as well as improved cash generated by the business. We believe, unless there is a major shift in underlying commodity markets, the current outlook provide sufficient operating liquidity for the near term, regardless of whether or not the Smithfield Beef Group transaction takes place. As we mentioned in the 10-K, Smithfield is taking advantage of hedge accounting treatment on a selective basis, when possible, to account for our risk management activities. Management believes that hedge treatment most active accurately reflects fundamentals and timing of our business. The loss from continuing operations for the first quarter includes an after-tax negative mark-to-market adjustment of $20.1 million, or $0.15 per diluted share, representing losses in the futures market associated with upcoming periods that do not qualify for hedge accounting. As Larry pointed out, if this mark-to-market adjustment of $0.15 is combined with the $0.04 loss from discontinued operations at Campofrio, Smithfield results for fiscal 2009 first quarter show a slight loss of $0.02 per share. I'd like to thank you very much for your attention. I will now turn this back to Larry. Thank you. www.streetevents.com Contact Us 6 © 2008 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.
  8. 8. FINAL TRANSCRIPT Aug. 26. 2008 / 9:00AM, SFD - Q1 2009 Smithfield Foods Earnings Conference Call Larry Pope - Smithfield Foods, Inc. - President, CEO Thank you, Bo. Obviously, we've got a great deal going on. That was a nice report from you, Bo, and there's an awful lot going on. As you can see, Mr. Manly has taken the helm of the financial area very well. I'm very pleased with that. As we look forward from here and you look into the beginning of the second quarter, hog prices look better and corn has moderated, so the thought is, well, things are much better. However, as most of you know who have been in this business, as we move into the fall portion of the year, hogs generally trend down as we have the fall hog run upon us. We expect to occur certainly in September and as we go deeper into the fall. So while live hog prices are high today, I do not expect that to continue. As well, corn has moderated from its height in the $7.50 range, or closer to $8, back to just over $6 and for a while was well below that. However, our raising costs, as you know, have delayed impacts as they have long feeding times for these animals. And so the effects of any corn changes take long periods of time to come to a (inaudible). So while corn may be moderating, we have still got lots of high-price corn that we have fed into these animals and are continuing to feed relatively high-price corn, so I expect to have continued elevated raising costs, as I pointed out in the press release. Fresh pork has been very good, and I expect that fresh pork will continue to be good. Whether it will continue at these levels or not, I do know. Generally, the first quarter is weak for fresh pork. That was not the case. As you go into the fall and the winter, fresh pork is generally good. So I expect fresh pork will be good for the Company. Our packaged meats business will probably be below last year. I expect this high-priced raw material to be with us. As a result of that, I expect, as we push -- attempt to push through these price increases on the packaged meats side, that's going to be difficult. And so I expect there to be some continued pressure on our packaged meats business, both in the United States and in our European operations. I expect exports as well to be very good. They have been exceptionally good. As you know, the US dollar is strengthening to some degree, and so at this point, it's difficult to tell how strong these exports will continue to be and whether these markets on the -- these foreign markets will continue to yield US pork as a cheap commodity. But as we've said a couple times, these are very uncertain times. These markets have been volatile like they have never been volatile before. To see the movements that we're seeing in the grain markets and in the live hog markets that are occurring is staggering to us on a daily basis. And so, it's extremely difficult for us to give any kind of good vision and clarity in terms of what we think the future is except to give you a point-in-time reference, and that's what I'm giving you this morning. As Bo indicated, we have cut back our capital expenditures in reaction to the reduced profitability, and CapEx will be running no more than below depreciation compared with the prior two years in which capital expenditures have been $200 million above depreciation. That is coming to a halt and has come to a halt now for some three months and will continue there until the business turns around. We do expect the Groupe Smithfield Campofrio merger to go forward. We're finalizing the last details and we are very hopeful, at the end of the second quarter or worst case the early part of the third quarter, that the Campofrio Groupe Smithfield merger will be cleared and will occur. As well, we should be hearing relatively shortly now from the Justice Department. We're in the latter stages of the second review process. We expect to hear from the Justice Department shortly relative to any concerns they have on the beef transaction. We still fully expect the beef transaction to close in the second quarter, although Bo has pointed out that we believe that, absent some catastrophe, that we have certainly the balance sheet and the liquidity even if that does not occur. www.streetevents.com Contact Us 7 © 2008 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.
  9. 9. FINAL TRANSCRIPT Aug. 26. 2008 / 9:00AM, SFD - Q1 2009 Smithfield Foods Earnings Conference Call One point that I feel compelled to make as part of the current operations and the future is our frustration with the ethanol and the energy policy in this country. We continue to be bothered by this policy that we believe is not good legislation and is not good economic nor energy policy but has tremendous impacts on this business and all of us in the protein industry feeding livestock. As you know, the mandate that is out there and the subsidy that has been out there certainly favors the conversion of corn into fuel. In effect, we're competing with oil prices to feed to our livestock. This has certainly had a substantial impact on the run-up in the corn markets, both in the US and around the world. And so we continue to push for government to review this issue and to review the logic and the economics behind this policy that we believe is flawed. Absent that impact on our business, I believe that this business would be in exceptionally good shape and we would be doing even better than we are today. But unfortunately that is the reality in which we live with, and until these markets adjust correctly for this everywhere, we're going to be suffering and laboring under a policy that forces us to compete with the oil companies for corn. And so much of this corn now looks like it's going to be a third of this crop is going to be converted into ethanol. That kind of impact on the grain markets is substantial. It is pressuring our whole margin structure and is going to result in substantial food inflation in this country that both Smithfield and many of our competitors are seeing across this industry. So, I don't know if you can do anything about it; you probably can't. I am only venting some frustration this morning that I think we're running the business very well, and many parts of this business are in terrific shape. Unfortunately, I've got an outside dynamic that we are having to deal with that is frustrating to the P&L of this company. So with that being said, I think our management changes are focusing on plant rationalizations and cost controls. As I said, this new management team has hit the ground running. I think there is going to be more about that in the coming quarters. You might very well read about some more plant rationalizing we're going to likely do. We haven't made any final plans there but we are looking at that. I think we're getting our cost structure more and more competitive and I think we're going to be a very good competitor and have a very good cost structure here going forward. I'm very pleased with that. With that being said, Jerry, we will welcome calls from anyone out there. Jerry Hostetter - Smithfield Foods, Inc. - VP IR Operator, if you will open up the floor to calls please. QUESTIONS AND ANSWERS Operator Thank you. (Operator Instructions). Ken Zaslow, BMO Capital Markets. Ken Zaslow - BMO Capital Markets - Analyst Looking through your press release, one of the things I saw that was -- it seemed like you were a little bit less enthusiastic about the future. I guess what surprises me is you don't really talk about the sow liquidation or the gilt liquidation. Can you talk about where you see that going, and how that's going to influence the future for you? Because it seems like that was a clear absence from your press release. www.streetevents.com Contact Us 8 © 2008 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.
  10. 10. FINAL TRANSCRIPT Aug. 26. 2008 / 9:00AM, SFD - Q1 2009 Smithfield Foods Earnings Conference Call Larry Pope - Smithfield Foods, Inc. - President, CEO I was looking at sow liquidations here yesterday, Ken, and I think the last 21 weeks, we had 15 weeks in which sow liquidations were north of 10%, 5 or 6 weeks when sow liquidations were well below 10%. It a little fickle number, and it seems like, whenever the corn markets drop a little bit or the hog market goes up, sow liquidation that week drops off. We've had all of these issues out there, as you may be aware of, of sows backing up and not being able to be processed. I think it continues to be a positive. I hope we are not -- I hope, through some of these grain moderations, that some of those that were making decisions about whether to get out of this business or to reduce their sow herds don't give a second thought to that because we do need to control the supply. I can assure you that the announcement that we made last February where we're reducing our sows, that process continues. We have not wavered in that at all. We're doing our share in terms of what we think needs to be done. I think the sow liquidation numbers continue to say the industry is liquidating. Although you saw some numbers coming out of Canada that didn't necessarily think the liquidation was occurring as fast, and it wasn't as much take up of the government program. And so in some of the numbers, the sow liquidations don't necessarily translate into exactly the herds coming down by those numbers. It's positive, and I think it is correcting. I wish the numbers were bigger. How about that? Ken Zaslow - BMO Capital Markets - Analyst Do you think that, in 2009 calendar, that you'll have less hog supply, and you're still thinking it needs to be more dramatic cut to get your hogs production margins positive? I'll leave it at that. Larry Pope - Smithfield Foods, Inc. - President, CEO I think two things have got to work in terms of hog production margin. I think hogs are going up. The futures market say hogs are going up. I think there is going to be less hogs in 2009 than there are in 2008. We will be fine. We will be fine because the hog market is going to driven by the export markets. If the export markets stay there, the hog market will stay there. The other side, which is a wild card, continues to be a wild card, is these grain markets. They continue to be so volatile and it is so difficult to predict the future because we can't get a handle on where grain costs are going to be on any kind of a long-term basis at all, so probability is probably going to be more driven by grain than it is by hogs. Ken Zaslow - BMO Capital Markets - Analyst Great, I appreciate it. Operator Ken Goldman, JPMorgan. Ken Goldman - JPMorgan - Analyst Good morning. I'm wondering if you can provide a little bit of extra color on the agreement with COFCO. It seems clear you've been working with them for a little bit of time, but I'm wondering if you could be a little more specific on the upside there, perhaps in terms of volume, in terms of what really you get back for the shares that you're giving up to them. www.streetevents.com Contact Us 9 © 2008 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.
  11. 11. FINAL TRANSCRIPT Aug. 26. 2008 / 9:00AM, SFD - Q1 2009 Smithfield Foods Earnings Conference Call Larry Pope - Smithfield Foods, Inc. - President, CEO Let's see. That's an easy answer. We don't get anything back today. We've got -- we have had a relationship with them since early last fall. We've been doing some business with that organization. I think they want to demonstrate their commitment to wanting to be a long-term partner with us, and they have been talking to us about making a capital investment in Smithfield now for quite some time; for more than six months, we have been talking about that. And so this is very much just a sale of common stock to that organization. We thought we needed to strengthen the balance sheet. We looked out at the convertible note issue. COFCO had been talking to us for some time so we said this might be the opportune time for you to come in and be a shareholder to make that capital commitment. They were pleased to do that. So there is no -- that is not tied -- today that is not tied to anything else. But I will tell you, Frank is coming on the Board with us. We're having discussions even this week with them on a more -- on longer-term opportunities that we might have for selling of meat or investing in China with those folks. I think this could be the beginning of a very long-term relationship. We don't know where it goes at this point except that we've got the largest people in China. It is a state-owned company who wants to do business with us. We're the largest producer in the world and we want to do business in that country. So the combination should work out well. They're trying to put some glue on the relationship by saying let us make a long-term investment, give you some capital that you need, but let's also make a long-term investment so that we can be partners for a long term. I think that's all there is today. I want a be clear with that. Ken Goldman - JPMorgan - Analyst Okay, thanks very much. Operator Jonathan Feeney, Wachovia Securities. Jonathan Feeney - Wachovia Securities - Analyst Good morning. Thanks. Larry, I wanted to follow up on your commentary on hog supply in answer to Ken's question, because you mentioned demand, and this kind of export demand is excellent, bordering on breathtaking. The question I would have is what would make you confident that export demand can even match current levels in '09, I'm talking calendar '09 versus '08, considering the strength of the dollar? I've got one follow up after that. Larry Pope - Smithfield Foods, Inc. - President, CEO I guess what's going to -- I guess what gives me some comfort today is these European markets are extremely strong. So from a competitive standpoint, the US is highly competitive and they're having liquidations in Europe as well and many countries are having very substantial liquidation. So I believe that the supply is going to be down. The hog supply is going to be down in Western Europe, and that's the primary competitor. You do have Brazil out there. Canada is becoming much less of a long-term issue on the export markets. So I think that -- and demand is there. Lots of the world has got increasing demand, so as you well know, exports have been actually accelerating. So, I think there is a very good likelihood that exports can continue to be strong now for some time. Bo, do you see it any differently? www.streetevents.com Contact Us 10 © 2008 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.
  12. 12. FINAL TRANSCRIPT Aug. 26. 2008 / 9:00AM, SFD - Q1 2009 Smithfield Foods Earnings Conference Call Bo Manly - Smithfield Foods, Inc. - EVP, CFO No. I think, Larry, you're right in terms of this being a very broad-based export situation where, yes, we had some extremely impressive volume increases with China and Hong Kong. But I think the thing that gives us the most optimism is the fact that Russia has been very strong; Mexico has been extremely strong, Western Europe where we're having record levels shipments to France to the UK as well, and look for more opportunities going forward. Frankly, right now the limitation to the exports to Europe is the fact that we're bumping up against quota limitations that the EU presents. We will be asking the EU over the next six to nine months to review that process and see if we can increase the quota of product coming from the United States into (multiple speakers). Larry Pope - Smithfield Foods, Inc. - President, CEO But we've seen shipments and Australia that we were losing to others, particularly Canada. Those Australian exports have come back to the US. So again, a lot of that is tied to the US dollar. If the US dollar substantially strengthens, that could change the world. I think the US dollar will strengthen; I'm just not sure it's going to strengthen over some relative short period here. I know it has a little bit. I'm not sure we're going to see a big strengthening and make us uncompetitive. I don't see it. Bo Manly - Smithfield Foods, Inc. - EVP, CFO No, but at the same time, you've got Western Europe with easily a 5% decrease in sow numbers. You have got Central Europe, Romania, and Hungary and that part of the world -- probably closer to 15% to 20% decrease. China has had some increases but they will still be below historical levels, and Mexico, while it's a difficult number to get, I guess our sources would say we've probably seen a 10% decrease in sow numbers in Mexico. The sow numbers have left the worldwide industry to create opportunities for pork and we will still be competitive price-wise on the world market. Larry Pope - Smithfield Foods, Inc. - President, CEO I guess that was a long answer to a short question. Jonathan Feeney - Wachovia Securities - Analyst Well, I thank you for it. Just one other question -- you mentioned a couple of times Western Europe hog prices being high and that challenging the profitability of your processing business. Yet, when I think about the longer-term vision around Poland and Romania in production, this should be the perfect conditions for you guys to be making money. I know, in producing hog's over there, or at least having access to lower cost raw materials over there, even if -- I know it is not a vertical integration model. Why aren't you able to buy advantageously in Poland or Romania right now, and maybe protect more margin? Larry Pope - Smithfield Foods, Inc. - President, CEO You mean why are we buying raw materials out of Eastern Europe or Central Europe, shipping those to Western Europe and processing them? I guess that's your question. Jonathan Feeney - Wachovia Securities - Analyst Yes, that's right. www.streetevents.com Contact Us 11 © 2008 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.
  13. 13. FINAL TRANSCRIPT Aug. 26. 2008 / 9:00AM, SFD - Q1 2009 Smithfield Foods Earnings Conference Call Larry Pope - Smithfield Foods, Inc. - President, CEO That's a longer-term plan here. Again, you're familiar with Europe; you know that's not as easily said as done. The other side is that we have had -- in Eastern Europe, you've got some extremely high-priced livestock. It's actually higher in those countries than it is in Western Europe. There has been some drought conditions over the past. It looks like it's going to be a good crop this year. But you'd actually had more severe price increases in Eastern Europe than you have had in Western Europe. That's a dynamic. This whole thing -- between these grains and these hogs, across many of the major places, these dynamics are setting new records everywhere. As I said, the carcass value in this country is the highest it's ever been. You would think that with, killing more hogs, that we wouldn't have that, but the fact is there is a liquidation, there's a shift going on in many places of the world that these dynamics are changing the way these guys work. So, while I agree with you on the surface, when you look at the detail, it doesn't work out like that today. Longer-term, I think you could be exactly right, and our positioning in Eastern Europe could work out to be just perfect. Jonathan Feeney - Wachovia Securities - Analyst Thank you very much. Operator Christine McCracken, Cleveland Research. Christine McCracken - Cleveland Research - Analyst Good morning. Just on the packing margins, we were a little disappointed with the results there relative to your peers in the industry. That maybe have an even greater percentage of their sales into processed meats. I'm curious. Is there any impact from I guess a negative mix shift with a lot of these fresh meat sales going into exports? Given the 33% increase I think in volumes that you're seeing in fresh meats, is that a factor there? Is there something unique about your business that depressed margins for you specifically? Larry Pope - Smithfield Foods, Inc. - President, CEO Christine, I've got -- maybe I am -- I'm not sure I understood that question. I'm not sure there are depressed margins anywhere. That's what -- you're doing some mathematical calculation that I am not sure I am following that is giving you concern. Help me to understand what you just asked. Did you get it, Bo? Bo Manly - Smithfield Foods, Inc. - EVP, CFO If you look at packaged meat margins, we don't see much change in terms of the percentage basis. I think what we're seeing in the United States to some degree, similar what we see in Western Europe, is that you do have some trading down of the consumer from the branded products to more private-label, which I think is the consumer reacting to higher overall price levels in the marketplace. Larry Pope - Smithfield Foods, Inc. - President, CEO Our profits on the pork segment more than doubled. As I explained, we made less money, we still made money, we made less money on the packaged meat side of the business. Our fresh pork was all (inaudible) substantially. www.streetevents.com Contact Us 12 © 2008 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.
  14. 14. FINAL TRANSCRIPT Aug. 26. 2008 / 9:00AM, SFD - Q1 2009 Smithfield Foods Earnings Conference Call Christine McCracken - Cleveland Research - Analyst Looking at it, just as a comparison, looking at price and over 5% margins on a business that technically should have yielded the same type of margin, I am a bit disappointed. I guess that's my cause for confusion. Looking at where the cut out was, looking at where margins should have come in, I'm disappointed and at 2% and less than 2.5% margin on that business. Is there something unique about your mix of business that puts that number significantly below Tyson specifically and down significantly from last quarter? Larry Pope - Smithfield Foods, Inc. - President, CEO I don't think so, I don't think, Christine. Now, I will tell you that our packaged meats margin, our packaged meats margins were not as good as last year's first quarter and they were not as good as our fourth-quarter margins. That's because the impact of the trimmings and hams specifically, not pork bellies, but those raw material costs are fully embedded in these packaged meats margins. But again, our packaged meat margins, the first quarter is not particularly a good quarter for our packaged meats business. As you know, we have a lot of big ham business, and that is not in this quarter at all. There's not much of it. But no, our margins, on a comparative basis to last year are not -- they're down but not dramatically down. Our fresh pork is up significantly. I know the point you're making is that Tyson's are up more than yours are. I can't explain that; I can only explain ours. But no, there's nothing fundamentally wrong with ours; I can tell you that. Christine McCracken - Cleveland Research - Analyst There is no negative mix implications of selling a lot more product than to export? That's my question. Larry Pope - Smithfield Foods, Inc. - President, CEO Well, our slaughter levels were up 14%. The actual number of hogs we processed was up 14%. Our fresh pork volume was up 33%. So there is some mix issue there, the difference is because all of that 14% essentially was sold in the export markets as fresh product because our packaged meat business was stable, so the raw material that was coming out of our fresh meat going into packaged meats was about (technical difficulty). All of that incremental 14% went in the form of fresh pork in terms of largely export business. It was large. A lot of it was some of this Chinese business that we've got, which was good business for us. So maybe it's just that pure math that's working out there. Christine McCracken - Cleveland Research - Analyst All right. I will leave it there. Thanks. Operator Vincent Andrews, Morgan Stanley. Vincent Andrews - Morgan Stanley - Analyst Good morning. I am wondering if I could just ask, you know, as we think about the volatility in the commodities markets and now with the dollar, is there a scenario where the dollar continues to strengthen, as oil comes down and so forth, but corn prices do not move lower with the dollar and you have weakening exports but you're still at higher reasoned raising costs. Is that something you're concerned about? www.streetevents.com Contact Us 13 © 2008 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.
  15. 15. FINAL TRANSCRIPT Aug. 26. 2008 / 9:00AM, SFD - Q1 2009 Smithfield Foods Earnings Conference Call Larry Pope - Smithfield Foods, Inc. - President, CEO I wouldn't sit here and tell you that's a situation that could not occur. I do think we have an awful lot of this business tied to the export market. We do have -- it is very unusual to see live hog prices going up again and again and again in the face an increasing slaughter levels. More supply doesn't generally mean higher prices. It means the inverse of that. Exports have been the key to that. The combination of a cheap US dollar and shrinking supplies outside the United States combine with increasing demand outside the United States. That's caused all that to happen. So if we were in a situation where the US dollar strengthens significantly, that is a negative to this business. I think that is true. If we had a situation where corn continued to stay elevated, I mean, that's a scenario in which the margins would not be as good. I think that's right. Vincent Andrews - Morgan Stanley - Analyst If I can follow up quickly, obviously the export demand part of it is driven by the dollar, but obviously part of it is driven by their own GDP growth. You also called out in the press release kind of overall economic activity. I'm just wondering. Are you at all concerned about China slowing or any of the emerging markets slowing, relative to export demand? Let's just assume the dollar is all else equal. Larry Pope - Smithfield Foods, Inc. - President, CEO No, I think there is a lot of economic growth outside of the US. I'm not really worried about that one. Let me speak to a -- I'm really not worried about that one. I'll tell you what the one that has some -- we started looking at is the US economy, but many times that's a positive to us as people come back home to eat, although we're not seeing the foodservice business fall off at this point. We're not. Our foodservice business is up. I do think there's going to be some migration towards the lower fast good as opposed to the more casual dining and even some of the white tablecloth. But it's coming back to retail. In some of the categories such as hot dogs, which have not been particularly good for us, we're seeing a movement back to hot dogs. So in many cases, we can be sort of counter-cyclical to the economy and actually see some pick-ups in a weak economy. But that's an uncertain situation; that's an uncertain situation. But I do know the world is changing in that department. So we're paying attention to that and looking at the products we produce. Vincent Andrews - Morgan Stanley - Analyst So it's really just that US economic environment that you're (multiple speakers) Larry Pope - Smithfield Foods, Inc. - President, CEO Yes, we're paying more attention to that than we are the world markets. Vincent Andrews - Morgan Stanley - Analyst Okay, that's very helpful. Thank you very much. Operator Reza Vahabzadeh, Lehman Brothers. www.streetevents.com Contact Us 14 © 2008 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.
  16. 16. FINAL TRANSCRIPT Aug. 26. 2008 / 9:00AM, SFD - Q1 2009 Smithfield Foods Earnings Conference Call Reza Vahabzadeh - Lehman Brothers - Analyst Just a couple of housekeeping questions, Bo -- the debt number that you mentioned, the $4 billion, that's all short-term and long-term, including your discontinued ops? Bo Manly - Smithfield Foods, Inc. - EVP, CFO It would not include discontinued ops. It would include all other short and long-term debt, plus capital leases. Reza Vahabzadeh - Lehman Brothers - Analyst Okay, and so on a consolidated basis, what would be the total debt level, if you have that handy? Bo Manly - Smithfield Foods, Inc. - EVP, CFO I believe it is the 4. -- let me get my notes here -- $4 billion. Reza Vahabzadeh - Lehman Brothers - Analyst $4 billion is including the discontinued ops? Bo Manly - Smithfield Foods, Inc. - EVP, CFO No, it would be without discontinued ops. For discontinued ops, can we get back to you with that? Reza Vahabzadeh - Lehman Brothers - Analyst Yes, sure. You mentioned the liquidity number, which is helpful. Is that all revolver availability, or is that revolver availability as well as cash on hand? Bo Manly - Smithfield Foods, Inc. - EVP, CFO It would represent revolver capabilities as well as cash on hand. Reza Vahabzadeh - Lehman Brothers - Analyst Okay. How much cash on hand did you have? Bo Manly - Smithfield Foods, Inc. - EVP, CFO It would be rather de minimis. We are looking at about $60 million in cash and cash equivalents. Reza Vahabzadeh - Lehman Brothers - Analyst I got it. You talk about the mark-to-market hedging loss in this first quarter. Did you have a mark-to-market hedging gain on your commodity hedges last year in the first quarter, or loss for the same time last year? www.streetevents.com Contact Us 15 © 2008 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.
  17. 17. FINAL TRANSCRIPT Aug. 26. 2008 / 9:00AM, SFD - Q1 2009 Smithfield Foods Earnings Conference Call Bo Manly - Smithfield Foods, Inc. - EVP, CFO It was not a gain for last year. Reza Vahabzadeh - Lehman Brothers - Analyst It was not a gain? Bo Manly - Smithfield Foods, Inc. - EVP, CFO It was about an $8 million loss for last year. Reza Vahabzadeh - Lehman Brothers - Analyst An $8 million loss, I see. Then do you have an LTM EBITDA trailing 12-months EBITDA for the beef business by any chance? Bo Manly - Smithfield Foods, Inc. - EVP, CFO Not at this point in time, we can get that to you, so we've got two follow-up points with you. Reza Vahabzadeh - Lehman Brothers - Analyst Just to circle one last question on the packaged meat margins, Larry, your comments suggest that they are running at reasonable levels, but they're facing some headwinds because of commodity costs. So they are not necessarily weakening precipitously. Larry Pope - Smithfield Foods, Inc. - President, CEO That is correct. One of the things we're not doing we're striving to do, from a reporting standpoint, we would like to be reporting to you packaged meats margins,. That's one of my goals to get accomplished here and Mr. Manly in his new position, because what we want to report that to you. We think that's important information, but all of that has got to get through our auditors and the SEC. So we can only report to you in vague terms, because we can't specifically report those numbers to you because we can't get the auditors to sign off on those numbers. Reza Vahabzadeh - Lehman Brothers - Analyst I got it. Thank you much. Bo Manly - Smithfield Foods, Inc. - EVP, CFO One clarification -- that number does include debt from discontinued operations. Reza Vahabzadeh - Lehman Brothers - Analyst Okay, thank you. www.streetevents.com Contact Us 16 © 2008 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.
  18. 18. FINAL TRANSCRIPT Aug. 26. 2008 / 9:00AM, SFD - Q1 2009 Smithfield Foods Earnings Conference Call Operator Heather Jones, BB&T Capital Markets. Heather Jones - BB&T Capital Markets - Analyst Good morning. Thank you. As far as your packaged meats margins, could you give us an estimate of the timeframe over which you think you can start passing through these higher costs? The trimmings, hams etc.? Larry Pope - Smithfield Foods, Inc. - President, CEO Heather, I think we are passing through the majority of those price -- of those cost increases. That is a surprise to me. Your question would be when do I think we will return to normal margins, I think is a better way of asking your question. I think the thing that's got to happen first is these margins -- is these markets have got to settle. They got to stop going up. As long as you're chasing it, you can't keep up. Then if you give this thing -- my estimation, Heather, give this thing six months after they have settled, and will be back to our margins again. Heather Jones - BB&T Capital Markets - Analyst Okay. I estimated -- it looks like industry packing margins about doubled from last year and so if I do about the same for you all, it looks like you had about a $0.02 to $0.03 pound deterioration further process. Does that sound about right or -- ? Larry Pope - Smithfield Foods, Inc. - President, CEO No, it's not that much. Heather Jones - BB&T Capital Markets - Analyst No? Finally, you had mentioned that you don't think hog prices are going to stay this high. However, live hog prices have been very strong, I guess due to a continuation of strong export sales even into August. So, I was wondering what causes you to believe that that's not going to continue? I understand you're concern about the futures, and maybe they're discounting too strong an environment, but even cash hog prices have been really robust. Larry Pope - Smithfield Foods, Inc. - President, CEO Heather, traditionally, once you get past Labor Day, you get what's called the fall hog run, when we have increased numbers of hogs coming to market as the temperatures cool in the fall. So that increase in supply generally nine years out of ten drives live hog prices down in the fall. It's very common. That's what I think is going to happen here in about another week or two weeks. In fact, our hog market was down significantly yesterday. That's what's giving me -- if history is any judge at all, (inaudible) it will be down as a result of just the pure seasonal effect. Heather Jones - BB&T Capital Markets - Analyst Okay, so seasonally, but like we've been seeing 20% to 25% year-on-year increases. So adjusting for the seasonal increase, do you still expect to see a strong year-on-year price? I understand the seasonal effect. www.streetevents.com Contact Us 17 © 2008 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.
  19. 19. FINAL TRANSCRIPT Aug. 26. 2008 / 9:00AM, SFD - Q1 2009 Smithfield Foods Earnings Conference Call Larry Pope - Smithfield Foods, Inc. - President, CEO Yes, I do. And I expect they'll be strong as we get through the season into January and February next year; I think they will be very strong. Heather Jones - BB&T Capital Markets - Analyst Okay, thank you. Jerry Hostetter - Smithfield Foods, Inc. - VP IR Operator, we've got time for one last question please. Operator Ann Gurkin, Davenport. Ann Gurkin - Davenport Research - Analyst Thank you. Larry, if could you help me understand -- I guess, as I was looking out to the second quarter, it was my impression that Smithfield had taken advantage of the spike in live [hog] prices we saw earlier this year to forward sell some of that volume. So I guess, given your comments in the release, is it the grain component that's throwing that projected margin off? Can you help me understand that a little bit? Larry Pope - Smithfield Foods, Inc. - President, CEO I think if you do -- certainly, you know -- I guess you know we don't give hedge positions except to say that we do know where the markets are. How about that? If you look at the markets this fall, where they have been, and you look at where grain is projected, relevant to raising costs, and I think our raising costs will continue to remain elevated, that shows an adverse -- even if you put hedges in place, you still are profitable in hog production. Ann Gurkin - Davenport Research - Analyst Okay. Then secondly, in relation to Butterball, you talked about you're evaluating cutbacks. Could you comment on what level of projected cutback you might be facing? Larry Pope - Smithfield Foods, Inc. - President, CEO Let me say that it's significant, Ann. I know a number; I don't want to comment on it because it affects how others react to it. But let me say that we are reacting to the supply issue significantly. How about that? Ann Gurkin - Davenport Research - Analyst Great. That sounds good. Thank you very much. www.streetevents.com Contact Us 18 © 2008 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.
  20. 20. FINAL TRANSCRIPT Aug. 26. 2008 / 9:00AM, SFD - Q1 2009 Smithfield Foods Earnings Conference Call Bo Manly - Smithfield Foods, Inc. - EVP, CFO There was a question earlier about 12-month trailing EBITDA for the beef segment. That number is $97 million for 12-month trailing EBITDA for beef. Just to clarify, $4 billion is the total debt of the Company. Larry Pope - Smithfield Foods, Inc. - President, CEO Thanks, Bo. Thanks, everyone, for joining us today. Have a good day. Operator Thank you. Ladies and gentlemen, this conference will be available for replay after 11 AM Eastern time today through midnight September 9. You may access the replay service by dialing 1-800-475-6701 and entering access code 956870. International participants may dial 320-365-3844 and enter the same access code, 956870. That does conclude our conference for today. Thank you for using AT&T Executive Teleconference. You may now disconnect. DISCLAIMER Thomson Financial reserves the right to make changes to documents, content, or other information on this web site without obligation to notify any person of such changes. In the conference calls upon which Event Transcripts are based, companies may make projections or other forward-looking statements regarding a variety of items. Such forward-looking statements are based upon current expectations and involve risks and uncertainties. Actual results may differ materially from those stated in any forward-looking statement based on a number of important factors and risks, which are more specifically identified in the companies' most recent SEC filings. Although the companies may indicate and believe that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate or incorrect and, therefore, there can be no assurance that the results contemplated in the forward-looking statements will be realized. THE INFORMATION CONTAINED IN EVENT TRANSCRIPTS IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE CONFERENCE CALLS. IN NO WAY DOES THOMSON FINANCIAL OR THE APPLICABLE COMPANY ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY EVENT TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S CONFERENCE CALL ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS. ©2008, Thomson Financial. All Rights Reserved. 1919578-2008-08-26T13:07:33.077 www.streetevents.com Contact Us 19 © 2008 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial.

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