FINAL TRANSCRIPT

            SFD - Q3 2008 Smithfield Foods Earnings Conference Call
            Event Date/Time: Feb. 28...
FINAL TRANSCRIPT
 Feb. 28. 2008 / 9:00AM, SFD - Q3 2008 Smithfield Foods Earnings Conference Call

CORPORATE PARTICIPANTS
...
FINAL TRANSCRIPT
 Feb. 28. 2008 / 9:00AM, SFD - Q3 2008 Smithfield Foods Earnings Conference Call

light of the risks and ...
FINAL TRANSCRIPT
 Feb. 28. 2008 / 9:00AM, SFD - Q3 2008 Smithfield Foods Earnings Conference Call

I'm going to touch for ...
FINAL TRANSCRIPT
 Feb. 28. 2008 / 9:00AM, SFD - Q3 2008 Smithfield Foods Earnings Conference Call

The offset to that is w...
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 Feb. 28. 2008 / 9:00AM, SFD - Q3 2008 Smithfield Foods Earnings Conference Call

Carey Dubois - Smithfie...
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per share. Looking at i...
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 Feb. 28. 2008 / 9:00AM, SFD - Q3 2008 Smithfield Foods Earnings Conference Call

So the markets do antic...
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QUESTIONS AND ANSWERS
O...
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 Feb. 28. 2008 / 9:00AM, SFD - Q3 2008 Smithfield Foods Earnings Conference Call


Larry Pope - Smithfiel...
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Diane Geissler - Merril...
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 Feb. 28. 2008 / 9:00AM, SFD - Q3 2008 Smithfield Foods Earnings Conference Call

Then just on the curren...
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Kenneth Zaslow - BMO Ca...
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Larry Pope - Smithfield...
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 Feb. 28. 2008 / 9:00AM, SFD - Q3 2008 Smithfield Foods Earnings Conference Call

It comes out as sow mea...
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 Feb. 28. 2008 / 9:00AM, SFD - Q3 2008 Smithfield Foods Earnings Conference Call

Larry Pope - Smithfield...
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 Feb. 28. 2008 / 9:00AM, SFD - Q3 2008 Smithfield Foods Earnings Conference Call

Operator
Our next quest...
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 Feb. 28. 2008 / 9:00AM, SFD - Q3 2008 Smithfield Foods Earnings Conference Call

We have made this comme...
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But by my calculations ...
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Standing margins are ve...
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 Feb. 28. 2008 / 9:00AM, SFD - Q3 2008 Smithfield Foods Earnings Conference Call

up, too. So beef has go...
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 Feb. 28. 2008 / 9:00AM, SFD - Q3 2008 Smithfield Foods Earnings Conference Call


Timothy Ramey - D.A. D...
FINAL TRANSCRIPT
 Feb. 28. 2008 / 9:00AM, SFD - Q3 2008 Smithfield Foods Earnings Conference Call

a lot of background now...
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smithfield food Third Quarter earnings transcript2008

  1. 1. FINAL TRANSCRIPT SFD - Q3 2008 Smithfield Foods Earnings Conference Call Event Date/Time: Feb. 28. 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 Feb. 28. 2008 / 9:00AM, SFD - Q3 2008 Smithfield Foods Earnings Conference Call CORPORATE PARTICIPANTS Jerry Hostetter Smithfield Foods Inc. - VP, Investor Relations Larry Pope Smithfield Foods Inc. - President, CEO Carey Dubois Smithfield Foods Inc. - Treasurer, CFO CONFERENCE CALL PARTICIPANTS Eric Katzman Deutsche Bank - Analyst Diane Geissler Merrill Lynch - Analyst Kenneth Zaslow BMO Capital Markets - Analyst Robert Moskow Credit Suisse - Analyst Christine McCracken Cleveland Research Co. - Analyst Pablo Zuanic JPMorgan - Analyst Jonathan Feeney Wachovia Securities - Analyst Farha Aslam Stephens, Inc. - Analyst Timothy Ramey D.A. Davidson & Co. - Analyst PRESENTATION Operator Ladies and gentlemen, thank you for standing by, and welcome to the Smithfield Foods third quarter conference call. At this time, all lines are in a listen-only mode. Later we'll conduct a question-and-answer session and instructions will be given at that time. (OPERATOR INSTRUCTIONS) As a reminder, we are recording today's call for replay. It will be available from 11:00 a.m. Eastern today and will run for two weeks through Midnight, March 13. To access the replay, dial 1-800-475-6701 and then you will be prompted for an access code. The access code is 912061. I'd now like to turn the conference over to our host, Mr. Jerry Hostetter. Please go ahead, sir. Jerry Hostetter - Smithfield Foods Inc. - VP, Investor Relations Good morning, and welcome to a conference call to discuss Smithfield Foods' fiscal third quarter results. We'd like to caution you today that in today's call there may be forward-looking statements within the meaning of the federal securities laws. In 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 Feb. 28. 2008 / 9:00AM, SFD - Q3 2008 Smithfield Foods Earnings Conference Call 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 2007. You can access the 10-K in our press release on our website at www.smithfieldfoods.com. I would like to cover one administrative detail as we get started. 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. We thank you for that. With us today are Carey Dubois, Chief Financial Officer, and Larry Pope, President and Chief Executive Officer. This is Jerry Hostetter, head 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, and good morning, ladies and gentlemen. I'm pleased to report this morning our third fiscal quarter results, income from continuing operations of $59.1 million or $0.44 a share compared with $62.1 million, or $0.55 in the same quarter last year. On the year to date basis we are at $139.8 million compared with $148.4 million and $1.04 versus $1.33. I hope you recognize in the numbers that we have substantially increased numbers of shares outstanding as a result of the Premium Standard Farms acquisition we did this past May. The PSF results are clearly included in these results for these three quarters. On an overall basis I am pleased with the results for this quarter. The pork segment of our business is clearly the outstanding leader here. That segment of the business is up more than 100%, in fact 125% year-over-year. That number is a very strong number for us. I think the vast majority of people who cover the Company are well aware that this was a very strong quarter for fresh pork. We benefited much as others did in the industry from falling live hog prices. That certainly does improve the cut-out numbers on the fresh pork side of this business. We as well were in a position that we ran our plants nearly essentially every Saturday this fall, and in fact we ran the plants one Sunday due to the very strong margins and the very strong business we had. Many of you know that we had an order for China that we were filling at that period of time and we simply didn't have the capacity on our sixth day and we had to use some weekend and took an unusual step of actually running the plants on Sunday. That part was extremely good. Beyond that the export business for the industry, and Smithfield in particular, has also been extremely good for us. That has also helped the fresh pork margins for everyone in the industry and ourselves in particular. The industry for the last couple of months is up 14%. Our exports are up 42% for the January through December period, the industry is up 4%, we're up 16%. Certainly the fact that we've got a very cheap U.S. dollar has accrued to our benefit. And that continues to help us and with our export markets. I know that so many people think that our business has largely been the result of some of the business of recent that we have alluded to in the Chinese market. But I assure you our export business goes far beyond, far beyond just the Chinese market. Our business in Japan and Russia and in the EU, which we are uniquely in a position to export to, those numbers are very solid. Very solid for Smithfield. The industry, as well has got nice numbers, but our numbers are extremely good numbers. So that has certainly helped to fuel these earnings in spite of the fact we had record kill levels this fall. The industry was able to absorb those record kills and sell this meat both inside the United States and outside the meat and propelled us to very strong results on the fresh meat side of the business. 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 Feb. 28. 2008 / 9:00AM, SFD - Q3 2008 Smithfield Foods Earnings Conference Call I'm going to touch for just a minute while I'm in the fresh meat side of this, I made the comment in our last call that I would be traveling in the very near future into China and looking at the Chinese market. I did that toward the end of January, and spent about 10 days in China in a number of provinces meeting with a number of government officials, as well as, as well as our good customer, and I can report to you this morning that we were very well-received and had a very cordial trip in that country and both at the very senior governmental level, at the local province level and I was in a number of provinces where I was meeting with provincial leaders, and as well with the government. And finally, importantly, the inspection service known as the AQSIQ, we have a very strong and very good relations with that government agency and they have been extremely supportive of Smithfield. And I can report to you that that was a very good trip for us. I think it's very good for us long term. We are going to follow that up over the next two quarters and sending a team into China, visiting, following up on my visits. And we are going to give this what I call a deep study. With the size of that market that it is with 50% of all the pork in the world being consumed in China and growing rapidly and two-thirds of their protein diet is pork, it's the product of choice. It's a market that we have not paid much attention to in the past, but a market we need to pay attention to going forward. And so I can't tell you much beyond that, which way we're going to go, except to tell you that I am very pleased with the trip and I am very pleased with the way we were treated while we were in that country. And it all went extremely well. So I'm just going to pass that on to you while I'm in the export and the fresh meat side of the business. Clearly the offset to the fresh meat business was the raising business. We have gone from a situation where the hog production business has been carrying us for the last couple of years to now that the higher raising costs, substantially higher raising costs of live production is not profitable. So the meat processing business has responded in the opposite side and has helped to offset those losses on the production side, but we are in an environment where raising hogs is not profitable. It is not the result of the production operations. Circle virus is well under control in our farms. [PERS], which many of you know is a standing problem in the industry, we refer to it as hot and cold and it is cool at this point. It has calmed down fairly substantially for us, and so we are getting good numbers in terms of production numbers. It's an overall issue associated with the largely, essentially grain costs and those costs are now reflecting through our raising costs, as is very prominent for everyone else and I don't need to explain that very much to all of you on the telephone. On the beef side of the business, I would tell thank you's not good. But our numbers still I think stack up very favorably with those others in the industry. We have, in the past, been plagued with significant losses on the cattle raising side. I told you several months ago we had dealt with most of that and that would be getting behind us as we took some of the higher feeder cattle and raised that out and completed that process and we're replacing that, back filling those with lower priced feeder cattle. We were always having much better beef processing numbers. They were being offset by cattle losses. That part is, neither particularly great. But from my standpoint, in a very adverse environment, we continue to deliver something on the beef side of the business. I am not at all satisfied with that. You shouldn't take that as a satisfaction, it's the fact that it is a very tough environment out there and has been now for some four years. We continue to compare favorably and I'm at least satisfied we are doing as well as we can in this market. Internationally, it's a mixed beg. Poland continues to perform well for us, particularly in the packaged meats business there. That business has grown very substantially and that business is very solid, even in spite of high live hog prices it is still a good market for us. Our Romanian processing plant is breaking even. Even as, again, we deal with some of these issues over there we are still breaking even, so it is not dragging us down. 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 Feb. 28. 2008 / 9:00AM, SFD - Q3 2008 Smithfield Foods Earnings Conference Call The offset to that is western Europe. We have hit a bump in the road there with our group Smithfield operations. They are feeling some of the pricing pressures of competition and we are not doing as well in our French and western European operations as we were a year ago. We are still profitable, but not doing not certainly at the levels we were some 12 months ago. I want to turn for a minute and talk about the packaged meats business. That's one of the shining stars I continue to talk about every quarter. And our packaged meats business this past quarter was again a very, very good quarter for us. We had a very good ham holiday season. The Company had both increased margins and increased volumes. We did have cheaper raw material, and that worked to our benefit. I would pass that through. But as well, we are -- we have got a very strong focus in this Company on that end of the business. So many of you who have talked to me a long the way know this is a big focus of mine. We have got a giant packaged meats business that I think has a lot of embedded potential and opportunity here. We are just starting to really mine this in a big way. We are heavily focused on that end of the business, and I can tell you as I made reference to in the press release, a number of the categories we continue to focus on again and again and again the convenience-oriented products are up significantly for us. Our precooked bacon business is up well over double digits for the quarter. Our precooked sausage business is up substantially, our precooked rib business is up very nicely, our spiral ham business is up. All those businesses are up very nicely and they are getting a double kiss here in that many of those categories are the same categories we acquired when we purchased the Armour Eckridge business a little over a year ago. I know there has been speculation out there that Smithfield made a mistake in buying the Armour Eckridge business that that's been quote a disaster for those guys and they are having to wrestle with that as we continue to point out to you we have rationalized plants. I can report to you today that the Armour Eckridge acquisition has been a very good one for this Company and it has been accretive from the day we purchased it. Yes, we continue to rationalize plants and we rationalized another plant just this past January in Lufkin, Texas. It was a cooking plant. It was under utilized and we reallocated and relocated the product to other plants, reducing our plant operating costs, rationalizing capacity, which we are continuing to focus on in this Company. But you should not take from that that this has not been a good acquisition for us. It is all essentially convenience-oriented products for this Company and that combined with the other businesses we have had in place, this portion of our business is, I will not tell you it is hitting on all cylinders, but I will tell you the engine is firing very well. Even in spite of, even in spite of the fact that we are all facing increased cost pressures in all areas of the operations. I know the protein side from live hogs to cattle to poultry, all of those we are feeling the lower prices, as I look at virtually every other cost that impacts this Company, and I get a report on that every week. I would say virtually 100% of everything else affecting this Company has gone up. So there is embedded food inflation, at least from my perspective, there is embedded food inflation in this country that is going to have to be passed on. To date it has not been, but I would suggest to you that I believe that there are price increases and these costs are going to have to be translated into higher food costs. I think that is coming to all of us. The big issue is clearly the fact that we've got a lot of protein in this country and I'm worried about that. But before I give you too much more on that, I want to at least turn this over to Carey and let him give you some financial numbers, and then I'll come back and speak about where we are going from there. Carey? 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 Feb. 28. 2008 / 9:00AM, SFD - Q3 2008 Smithfield Foods Earnings Conference Call Carey Dubois - Smithfield Foods Inc. - Treasurer, CFO Thank you, Larry. Good morning, everyone. Before I begin with the financial highlights, it is worth noting the only remaining macro difference in the quarter versus last year was the acquisition of Premium Standard Farms in May, 2007 and the inclusion of their results. Beginning with the income statement, sales for the quarter increased by 16% to $3.8 billion versus $3.3 billion for the second quarter last year. For a second consecutive quarter, sales were up across all of our business segments. The pork segment and hog production segment sales were up 13% and 30% respectively primarily from the Premium Standard Farms acquisition. International segment sales were up over 50% due largely to strong volume increases in Poland and Romania as we continue to build out their fresh and packaged meat platforms and also to foreign currency translation effects. Selling general and administrative expenses were up $60 million quarter-over-quarter. The increased expenses were largely attributed to the addition of Premium Standard Farms, foreign currency translation effects, and increases in the variable compensation expenses. Operating profit increased by 34% to $166 million versus $124 million a year ago. This increase was driven largely by improved earnings of $122 million or 122% in pork, due to the addition of Premium Standard Farms, lower raw material costs, growth in our export business, and expansion in our packaged meat margins. 70% of these gains were offset by an 85% drop in hog production results, which were adversely impacted by higher grain costs. Other noteworthily quarter-over-quarter changes were seen in the beef segment results, which realized an increase of the $11 million from positive results from both our processing and cattle feeding operations, and 2, from our Butterball operations which experienced a drop of $8 million from the impacts from higher grain costs. Adding back depreciation and amortization of $67 million dollars, plus impairment adjustments, our earnings before interest, taxes and depreciation and amortization were $236 million or 29% higher versus the $183 million for the same quarter last year. On a trailing 12-month basis, EBITDA was $773 million as compared to $613 million for last year. Equity and income results fell by $12 million to $15 million for the quarter, versus last year. The majority of this decline was attributed to two factors. First, we experienced a drop of $5 million to Group Smithfield due to a slight decline in sales volume and to a decrease in margins from the competitive price pressures for certain categories within our French and Dutch markets. Second, we had an $8 million decline in our Butterball operation results due to higher grain costs. Interest expense was up $19 million over the same quarter last year driven largely by an overall increase of $600 million in debt over the past year. This increase resulted from the acquisition of Premium Standard Farms, investments in eastern Europe and increases in working capital. For the quarter, you will notice that we increased the effective tax rate. We felt this was necessary due primarily to a change in performance outlook in eastern Europe for the year. Our eastern European businesses are subject to relatively lower tax rates, versus the U.S. As such, periods of good performance in that region tend to reduce the Company's overall effective tax rate. With the continued pressure on the results of our farming operations in Poland and Romania, we believe that we will have little if any favorable benefit from these lower tax rate jurisdictions in this fiscal year. Accordingly, we elected to increase the overall effective tax rate for the quarter, which also required a true up for the first and second fiscal quarters as well. We believe this adjustment negatively impacted net income by $0.06 per diluted share based on previously anticipated tax rates. Our final income state item is a $4.5 million charge taken for our discontinued operations. These charges stem largely from the sale of our biodiesel facility in Texas, which is currently under contract for sale. These charges impacted net income by $0.03 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 Feb. 28. 2008 / 9:00AM, SFD - Q3 2008 Smithfield Foods Earnings Conference Call per share. Looking at intra-quarter balance sheet and cash flow statement items. Capital expenditures for the quarter were $120 million as compared to $65 million in depreciation. The overall debt level within the quarter decreased by $69 million. Seasonal working capital reductions accounted for this drop. Our debt to total capitalization ratio was 55%, and our current available liquidity stands at over $450 million. With that, I will turn it back over to Larry. Larry Pope - Smithfield Foods Inc. - President, CEO Thank you very much, Carey. Looking forward, I know the question on everyone's mind as they look at this business and the protein business in general is these sharply higher grain costs. We are all seeing the same numbers, and we are all concerned about the same issue. I am convinced this issue will work its way through, as I have made the comment earlier, we have really not had much food inflation, and food costs have not gone up at this point. I know a number of us in the industry are talking about the fact that we cannot take these kinds of cost increases without raising our prices. The ability to raise prices is obviously subject to competitive pressure and we've all got competitive pressures at this point. There is a lot of protein in the market, whether that be poultry or that be red meat, there is a lot of protein out there in the market. I sincerely believe this problem will get solved. I don't think it can get solved by us wishing it away. And I don't think we can sit here and wait or hoping the other guy will do something. And in fact, that's not the position Smithfield has taken. We are doing something. I'm sure all of you saw last week that we made an announcement that we are reducing our sow herds between 4% and 5% effective immediately. That will take several quarters to get that fully implemented. We are committed to taking out sow production out of Smithfield's approximately 1 million U.S. sows, taking 40,000 to 50,000 sows out of production. We will either be abandoning those operations or converting those to finishing operations and that's going to happen. As well, I'm sure a number of you just saw this week that Canada has announced a support program toward the reduction of 150,000 sows in Canada. The combination of that, plus the announcement we had last week would total as much as 200,000 sows and would be somewhere in the neighborhood of 4 million plus total market animals being reduced from the market. And that's just the two of us. I wish I could sit here today and tell you that I saw a similar support program from the U.S. government for farmers in the United States. But routinely the U.S. government has not gotten involved in helping farmers through these tough times. Sometimes we certainly question that other governments come to the aid of their farmers on this side of the business. I think on the live production side, there's never been much support for this part of the business. And the Canadian government sees that as an area they need to help these farmers through. So I have not seen, I would acknowledge to you only anecdotally, through conversation, I know a number of people are telling us they are reducing their sow herds, but the proof will be in the pudding. When we see the sow liquidation numbers increase substantially, we have seen some ups and downs and more ups and back to even, but we haven't seen the big go to slaughter numbers that we expect will occur along the way here. But I do believe this problem will get solved. I mean this situation cannot continue like it is. It will be challenging for us. Even given that, as you look into the futures markets, into the summer months, at least, even with the higher raising costs, it is still going to be somewhat profitable through the summer. Not as traditionally a very profitable time for raising hogs as those who follow the market know very clearly. Even as you look into the fall the futures markets are certainly well above where we have seen and traditionally see in the fall period of the year. 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 Feb. 28. 2008 / 9:00AM, SFD - Q3 2008 Smithfield Foods Earnings Conference Call So the markets do anticipate that there is going to be some correction in terms of the number of animals coming to market. And I believe that those markets are probably reflective of what's going on with smaller farmers out there. And I think, over time, I certainly look 15 months out or 16 or 17 months out and say this situation will solve itself in that kind of timetable. Between now and then it is probably a little less clear. We have said that many times. It is hard to project a quarter out here. It is much easier to project a little farther out. What I can tell you is that from a Company standpoint, I think we are very solid from the operations side of this business. I think we are focusing this business on managing our production costs very tightly. We are focusing on our plant operating efficiencies and capacity levels and we are looking at the operations that are not contributing to the bottom line of this Company very critically. We have been regularly rationalizing capacity out of the business as this equipment becomes much more efficient and faster. The footprint that needs to be in place is substantially smaller, and we are shuttering operations as opposed to out there chasing business in an effort to fill these plants up. I have said many times I would much rather be a smaller, more profitable Company than a larger, less profitable Company and I think that is embedded in this organization and cultural thinking at this point. As I said in my earlier comments, the convenience products side of this business continues to be a very strong and growing part of this business. The margins there are substantially better than the commodity, unbranded, private label or commodity cut business. We are focusing on arbitraging what I call raw material opportunities in this Company. We are in a position to ration raw materials and in fact our buyer most of the time on many of the materials we need in this operation, so we are arbitraging to the best opportunity. That means cooked product. Brand development continues to be an area of focus in this Company. And I think that we are beginning to look at maximizing how this business can take this vertically integrated model that has been built up in this Company for more than 20 years and take that vertically integrated model and get the most out of it. The opportunities that we are seeing to move product into western Europe, the ability to sell product into the Chinese market, the ability to produce products for the Russian markets and Japanese customers all give us very nice opportunities for margin improvements and those are being reflected in these operating profits that you are seeing in the pork segment. You can tell from my comments that I am extremely bullish on this part of the business. Raw material costs have helped us. No question about that. Beyond that our focus on that I believe as well as helping us, and we are continuing deliver these profits in spite of $100 oil out there, as well as virtually every other ingredient that goes into our products from the packaging to the boxes to the seasonings and the operation of the trucks, to the maintenance, to parts. There are cost increases, as many of you have heard from many of your other companies that you follow, those are embedded costs and we're having to accomplish those through improved efficiencies. And I'm proud to say we are paying attention to those and we are reacting to those. With that being said, I would open this up to questions, and, Jerry, I'll turn it back to you. Jerry Hostetter - Smithfield Foods Inc. - VP, Investor Relations Okay. Operator, we'll be glad to take the first question, please. 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 Feb. 28. 2008 / 9:00AM, SFD - Q3 2008 Smithfield Foods Earnings Conference Call QUESTIONS AND ANSWERS Operator Thank you. (OPERATOR INSTRUCTIONS) Our first question comes from the line of Eric Katzman with Deutsche Bank. Please go ahead. Eric Katzman - Deutsche Bank - Analyst Hi. Good morning, everybody. Larry Pope - Smithfield Foods Inc. - President, CEO Good morning. Eric Katzman - Deutsche Bank - Analyst Congratulations on getting through a successful quarter and a tough period. I guess, Larry, my first question is in the press release you kind of noted that calling out that the fourth quarter might be a bit more of a challenge in hog production. Is that, is that just a function of your hedges or just the market being a bit worse? Maybe you could kind of comment a bit shorter term? Larry Pope - Smithfield Foods Inc. - President, CEO As I look out there, Eric, there is no question the near term outlook for hog prices in our fourth quarter, of which we are now one month into it as I guess this week, I mean hog prices today are, I guess the live hog market is $43 this morning. Clearly with raising costs into the 50s, I guess, I wouldn't say into the 50s, right at 50. At least the first month of the fiscal quarter, it is not going to be, it is going to be ugly on the live production side. And I think that we could see this all the way, I think there is going to be some improvement. I'm trying to be careful here. I think it will be an improving situation as we go through the quarter. But I think it is going to be a rough quarter for live production. I think this fourth quarter we do have increasing, raising cost here. I think I have explained, and I think Carey has attempted to a couple of times, to explain to you we went to this mark-to-market accounting I guess it was in the third quarter of last year. So we've been on it a year. So as we have hedges in place we have to mark-to-market those hedges. So in effect, the grain calls that you actually see in our raising costs are the cash prices we pay, plus the profit or loss change in the hedging position since the last time you measured them. So as these grain costs have gone up we picked up a hedge benefit early on. In fact, you don't see that benefit, it is a struggle we deal with all the time. It doesn't necessarily get matched with the quarter in which these hedges were put in place. That is the reality of mark-to-market accounting. I know that is a very long-winded discussion to say I think we are going to have relatively cheap hogs this quarter and we've got a situation of continuing to have increasing raising costs. It is that simple. Eric Katzman - Deutsche Bank - Analyst Okay. Just as one more follow-up I'll pass it on per Jerry's instructions. The comments about China, longer term, sounded very interesting. I'm sure it seems like an interesting opportunity to you and an area you haven't necessarily focused on. Does that mean, CapEx has been running well ahead of D&A? Should we, in our models, kind of think about that the bias on CapEx is now kind of up given the potential for you to put money into that, into that market? 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 Feb. 28. 2008 / 9:00AM, SFD - Q3 2008 Smithfield Foods Earnings Conference Call Larry Pope - Smithfield Foods Inc. - President, CEO That's going to take me a minute to explain that one to you. Let's start by saying that we have been spending CapEx for several years now in eastern Europe in a big, big way, and Carey pointed that out. Even the CapEx this quarter was double depreciation. That is largely the impact of our continuing to build out the live production operations in eastern Europe. We have slowed that down pretty significantly. So the CapEx commitment to eastern Europe is going to fall off here relatively quickly here. So that will be coming back the other direction. From an investment standpoint in China, we are just starting the process here. Those people have been very cordial to us and I thank them for that. They were more than gracious to me and I did say thank you to the Chinese government. But that's going to take some time to work through. It is a process where we would be new to that country. It's a new process for them. They are in small, rural farming development. I don't see any huge CapEx coming at us in that country for some period of time here, if we make that decision. And we have not made that decision. We've only made the decision to give this a good, strong look over the next three to four months. That's what we have committed to do. And so I don't think that you should yet make that decision. At this point, if I were you, to have a bias, my bias would be the CapEx will be trending down, not trending up. As we make our decisions on China, we'll report back to you, and then I would tell you to change your bias. But for now, I would tell you to hold your bias toward the downward side as you see the giant CapEx we have been making to eastern Europe begin to trend down. Eric Katzman - Deutsche Bank - Analyst Okay. Thank you. Operator Our next question comes from the line of Diane Geissler with Merrill Lynch. Please go ahead. Diane Geissler - Merrill Lynch - Analyst Good morning. Larry Pope - Smithfield Foods Inc. - President, CEO Good morning, Diane. Diane Geissler - Merrill Lynch - Analyst Congratulations on your quarter in a tough environment. Larry Pope - Smithfield Foods Inc. - President, CEO Thank you. 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 Feb. 28. 2008 / 9:00AM, SFD - Q3 2008 Smithfield Foods Earnings Conference Call Diane Geissler - Merrill Lynch - Analyst A question on, you talked a little bit about hedging on the grain side. I'm looking at the hog piece. And what you called out as the live market hog price. If I look at that in comparison to the revenue you booked, it suggests that you actually experienced something a little bit higher in terms of your, the prices realized on your hogs? Not sure if I'm doing the math right. But was there some forward sales of hogs, earlier, say last fall, that you saw the market coming down and you went ahead and took some coverage? Larry Pope - Smithfield Foods Inc. - President, CEO Diane, I guess I'll answer that question simply and easily. You probably won't like the answer. We are very careful with our hedging positions. I think Smithfield has been very successful and I give a lot of that credit to Joe Luter. That's what he spends a lot of his involvement with the Company doing. Mr. Luter does an excellent job in that end of the business, and my compliments to him. His experience there over the 30 years has been invaluable to this organization. We do routinely put hedges on, take hedges off. We do it with hogs, we do it with grains. We do it with cattle, as far as that goes. So I guess what you are reading. I guess what you are gleaning, I'm not sure what, I guess you are looking at that paragraph relative to hog production operations and trying to glean, trying to do some calculation of the sales number relative to something else. I'm not sure. But -- Diane Geissler - Merrill Lynch - Analyst Where you mentioned live hog market prices averaged $37 per hundred weight. Larry Pope - Smithfield Foods Inc. - President, CEO Yes. Diane Geissler - Merrill Lynch - Analyst Your revenue line would suggest that you realized -- I guess my question is, is that a cash market price or is that your price that you realized? Larry Pope - Smithfield Foods Inc. - President, CEO The other thing you are seeing on that revenue line has all kinds of things in that in terms of selling livestock outside. I don't know that you can do that direct care. I don't know if you can do that direct math or not at all. I wouldn't tell you that is not necessarily a good proxy for the math. But I'm not going to tell you we don't routinely put hedges on and take hedges off in all those categories. So it's an important part of this business, I will tell that you. Diane Geissler - Merrill Lynch - Analyst Okay. I appreciate that. 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 Feb. 28. 2008 / 9:00AM, SFD - Q3 2008 Smithfield Foods Earnings Conference Call Then just on the current market environment with where grain is and hogs, can you give us an idea about --versus your raising costs today where a break even on hogs prices would have to be? Where would hog prices have to be in order for you to break even? Larry Pope - Smithfield Foods Inc. - President, CEO I think we are going to be in a raising environment in the fourth quarter. We said this quarter our raising costs were $49. They continue to go up. I'm telling you our raising costs in the fourth quarter, Diane, are going to be over $50. And more like $51. I haven't seen the final numbers. Some of that could depend on where we have to end up buying grain during the quarter. But I don't think they are going to be above $52 but if they are going to be above $50 I'll tell you that. If I had to pick a number now I would tell you my fourth quarter raising costs are going to be $51. If I had to pick a number. But I'm not, give me the latitude of a little bit there. Diane Geissler - Merrill Lynch - Analyst All right, I appreciate that. Thank you very much. Larry Pope - Smithfield Foods Inc. - President, CEO You are welcome. Operator Our next question comes from the line of Kenneth Zaslow with BMO Capital Markets. Please go ahead. Kenneth Zaslow - BMO Capital Markets - Analyst Good morning, everyone. Larry Pope - Smithfield Foods Inc. - President, CEO Good morning. Kenneth Zaslow - BMO Capital Markets - Analyst Larry, did I hear you correctly when you said this quarter will be bad, but there will be profitability over the summer if you just use the futures and even the current feed environment? Is that what I heard? Larry Pope - Smithfield Foods Inc. - President, CEO You did hear me say that. 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 Feb. 28. 2008 / 9:00AM, SFD - Q3 2008 Smithfield Foods Earnings Conference Call Kenneth Zaslow - BMO Capital Markets - Analyst That was just a point of clarification. The second thing is, there has been a lot of rumors about the possibility, and you guys have been pretty forthcoming about what you guys would do with different acquisitions and divestitures, your beef operation has been rumors of interested parties in your beef operation. Can you give us that -- kind of your scope of how you would look at a potential sale of your beef business? Or what you are looking to do in the future with it? Larry Pope - Smithfield Foods Inc. - President, CEO I would tell you, Ken, if you haven't been rumored about in the beef business in the last year, nobody is paying attention to you. I think the rumors have been, I have heard from everything we are selling all our beef operations to we are buying everybody else's beef operations. And I've heard we are building a new plant, we are not building a new plant. If you are not being rumored, you are not of substance. I think that I have said a number of times that I didn't like the structure that we were in that I thought we were, our plants were on the edges of the United States or relative outside of the close proximity to the feedlot. So I said we are not positioned correctly. I don't feel any rush to do anything. We are still doing well. I think that it is options that we are all studying. I think most everyone in this industry is studying the options of how to turn this beef business around, and exports would help, opening these export markets would help. At this point, I mean I guess I'm not going to make any more comments than that. Certainly I'm not going to comment on some silly rumor. But when we have something to report to you, I will be forthcoming with that as soon as we can. Kenneth Zaslow - BMO Capital Markets - Analyst Great. I appreciate it. Larry Pope - Smithfield Foods Inc. - President, CEO You are welcome. Operator Next we have the line of Robert Moskow with Credit Suisse. Please go ahead. Robert Moskow - Credit Suisse - Analyst Hi, thank you. I'm just doing my math here on what break even would be, given what the futures are for corn and soybean meal. I'm looking at a minimum $5.30 corn at the end of the year, and maybe $340 of soy bean meal. I have got to be honest with you at those levels it looks like break even could be like $0.60 a pound? Am I doing the math correctly? You are talking more 51. I know that is near term. As you look out in the market longer term do you think it could get that high? 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 Feb. 28. 2008 / 9:00AM, SFD - Q3 2008 Smithfield Foods Earnings Conference Call Larry Pope - Smithfield Foods Inc. - President, CEO Well, Rob, there is no question. As you look at the corn costs as you go farther out and meal as you go farther out, costs could I mean, my numbers don't look quite as high as that. But I do understand how you do that math. And you are right. I said $51 for the current quarter. And that is a process of evolving. Remember hogs eat their entire life cycle, so it is a growing situation. But if we do continue to have corn at this $5.50, and we continue to have this meal up here at $350, we are going to have some high-priced hog raising. There is no question about that. I think, again, I might question whether it gets to $60. But I get into the upper $50s I'll tell you that. That is why I tell you this thing has got to be, we have got a lot of protein out there. The big issue today is there is a lot of protein. There's a lot of competitive pressure from other proteins. And our own protein. We killed 108 million hogs last year. A record. That is up 4 million from the year before. We are taking between what Canada is offering and what Smithfield is doing that's a reduction of 4 million hogs a year. That is the reduction. It is probably not enough. And if I were a farmer today, if you look at this hog/corn ratio, you don't have to be a rocket scientist to say when this hog/corn ratio is below 10, and I think it's 7.5, God knows, if I were a farmer I would sell my corn. Why risk raising the hog? He get PERS. He may die or you may have another issue. Why not just sell the corn? Put the money in the bank and more importantly put it in your gas tank and not be in the hog business. So I think that -- Joe Luter has used the comment for a number of years. The cure for low prices is low prices. I think everyone is feeling this enormous pressure out here. Everyone can do the same math you are doing, Rob. I think some's got to happen. Robert Moskow - Credit Suisse - Analyst Yes. I'll ask my follow-up. You set a goal for $0.10 a pound for value added in terms of profitability. How do you think you did in the quarter against that goal? And then another follow-up also. When you start slaughtering all these sows, you are going to create a lot of meat for sausage. Is there a threat you end up with excess supplies of sausage during that time period and would that hurt your value-added margins? Larry Pope - Smithfield Foods Inc. - President, CEO I don't know which one of those questions to answer. Let me say the third quarter was a very good quarter. We got our $0.10 in the third quarter. How about that, Rob? Robert Moskow - Credit Suisse - Analyst Okay. Larry Pope - Smithfield Foods Inc. - President, CEO We got above our $0.10 in the third quarter. That is a good quarter for us. I expect that to be the best quarter. I told you we had a great ham season this fall, it was the result of cheap raw materials. We are doing our packaged meats business, I'm not using processed meats anymore. I'm using the word packaged meats. Now your question about sows going to market. There's actually been a back up in the sow slaughter operations. If you track the market, you'll see the sow market dropped dramatically here a few weeks back. It has recovered as those have caught back up. It is all relatively from a big standpoint, it's relatively modest volumes. 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 Feb. 28. 2008 / 9:00AM, SFD - Q3 2008 Smithfield Foods Earnings Conference Call It comes out as sow meat and trimmings and such into the marketplace. Those don't really, that kind of volume it is just sows, that kind of volume is not really going to impact this market. I wouldn't worry about that. Robert Moskow - Credit Suisse - Analyst Okay, great. Thank you. Operator Our next question comes from the line of Christine McCracken with Cleveland Research. Please go ahead. Christine McCracken - Cleveland Research Co. - Analyst Good morning. Larry Pope - Smithfield Foods Inc. - President, CEO Christine, we make you get up early, don't we? Christine McCracken - Cleveland Research Co. - Analyst Not unlike every other day. Just on these pork inventories, they were up pretty significantly in this last report. Drove the hog market lower. What do you think is behind that? Larry Pope - Smithfield Foods Inc. - President, CEO Well, Christine, a fair amount of that is, if you look, is the inventory of hams in the freezer. And I can't tell that you we are not, we are not a substantial part of that. I will tell you that this product, many of us had been putting product away for the export markets. They are showing up in those freezer inventories. So I think that what you are seeing the impact of the export business as it goes through the freezers. And so I would tell you that you, certainly on a good portion of this, I'm looking at the breakdown as I speak to you right now. From our standpoint it's all sold. So I'm not worried about those freezer inventories at all. In our case it is 40% increase in frozen inventory. When you are selling these frozen boneless hams to Russia, that product has got to go through the freezers. So that's just the process. I understand the numbers you are looking at and I saw the same numbers did you and said give me the breakdown of what is in there and what portion of that is ours. So I think the industry is seeing a nice pick up in exports. It is helping all of us. And it's almost, I would say it's all, most of it is sold on a frozen basis. That is what happened. It's going through the freezers. Christine McCracken - Cleveland Research Co. - Analyst It seems like bellies were up a lot, too. Is that weaker food service? Can you comment on what you're seeing -- 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 Feb. 28. 2008 / 9:00AM, SFD - Q3 2008 Smithfield Foods Earnings Conference Call Larry Pope - Smithfield Foods Inc. - President, CEO That's the impact of $0.75 bellies. When bellies are generally well over $1 to $1.25. And if we are going to have $57 hogs this summer we are going to have some high-priced bellies this summer. I won't comment on our position except to say some people in the industry thought it might make sense to put bellies in the freezer at $0.75 and pull them back out this summer. Christine McCracken - Cleveland Research Co. - Analyst Got it. And then just a follow-up, on the production cut you announced obviously a good proactive measure there to cut and do your part in terms of liquidating the herd. But we haven't seen maybe the same kind of announcements, aside from a small California operation, by Hormel to take production out. What do you think it is going to take? Is it a timing issue? Or is it that the market's over this summer are, just like you say, break even or so, is that keeping people from, in the U.S. from liquidating maybe at the rate we would expect given the prospects for much higher feed costs? Larry Pope - Smithfield Foods Inc. - President, CEO Christine, I have heard that some producers out there had bought some of their corn ahead on the futures market. So into the summer. So some of those, some of those producers have hedged that portion of the business and maybe they aren't feeling the pinch yet. And if you look at this $57 market out there this summer, some will say even at these costs mine are going to be close to that, but I'll still be okay. I think even the run up we have had in the last seven days, these market shocks, the conversation that we have in the industry is this has been a shock even this week. And I think our announcement probably got people to thinking. I think this Canadian announcement this week has people thinking. Have I got any, have I got any hard information I can tell you today? I could only give you, Hormel was what, 9,000, I think, which is not going to change the world, either. But I think that now people are, the rumors, the comments have always been in the past why don't those big guys do something about it. They always want us to reduce our herd. Why don't they do something? Well, the fact of the matter is the big guy did do something. The big guy came out first and said I'm going to reduce our herd. That is a publicly-traded company. Another one, Hormel, a publicly traded company, came out and said I'm going to do something about this. The Canadian government has come and and said we need to do something about this. So I think that that's given some, at least put some people to start thinking much more than they were thinking before. Even this week these shocks to this market have got people, one, scared of it, and number two, if they've got the opportunity between hogs and grain, I mean they have got to make one more decision and say why raise the pig if I can sell the grain? I know that is not a very good answer for you, to me it looks as plain as day to me. But I'll agree with you. I haven't quite seen the numbers yet. Christine McCracken - Cleveland Research Co. - Analyst Thank you. 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 Feb. 28. 2008 / 9:00AM, SFD - Q3 2008 Smithfield Foods Earnings Conference Call Operator Our next question comes from the line of Pablo Zuanic with JPMorgan. Please go ahead. Pablo Zuanic - JPMorgan - Analyst Good morning, everyone. Larry Pope - Smithfield Foods Inc. - President, CEO Good morning. Pablo Zuanic - JPMorgan - Analyst Larry, I just want to go through a thought process in terms of you giving guidance for (inaudible) earnings in the summer. I guess, obviously, if you are fully hedged on hogs and you're making use of those above average hog futures and your fully hedged on grains, I agree. But to an earlier question you said you didn't know what your raising cost was going to be for the April quarter because you had to still buy the grain. I'm surprised, I always thought you were about nine months hedged? And related to that, your raising costs have been $49 for three quarters in a row. My question is when I look at the amount of supply on the hog side growing around 4% in terms of pork, adjusted for seasonality, I don't see a pool on hog prices? And then on the raising costs, I agree with the assessment you could get up to $59. So, and then you also said that the sows slaughter numbers took 15 to 17 months to really make an effect. So hog futures in the summer are high, not because of sow slaughter cut backs, but I would say because people are speculating on China. So, net, I'm trying to get a sense, I mean, for you to go out and say you are going to make money on the hogs in the summer, you already have to be hedged already on hogs and grains. Otherwise, I would argue that spot prices for hogs in the summer would probably come down from what futures imply, and your raising costs are going to go up. Can you comment on that? Larry Pope - Smithfield Foods Inc. - President, CEO Well, Pablo, I think what you are trying to do and I'm for the going to agree to that is to tell me what my hedge position is for the summer. I'll tell you again we routinely take advantage of these markets when we think it makes sense for us on both sides of this thing. And the $59 raising costs that you just calculated is if corn stays at these very elevated levels for a year. Remember that you got, you have got a feeding process here that you have got to go through, through the sow, through the baby pigs and into the finished weights and you know by this summer you know those costs will not be $59, I don't believe for anybody in the industry. So I believe at $57 for the summer, if the futures are right, $57 for the summer will probably yield some profit. I don't think it is customarily the kind of margins we are used to seeing when hogs are $57, and not even the kind of margins we are used to seeing in the summertime. But I think today you could, today you could lock this thing down and put yourself into a profit situation. I mean, I think that's, you did the math, Pablo, so you agree with that. I think farther out that gets much more problematic. And finally you made the comment that I'm hedged generally nine months out. I thought I explained a few minutes ago the fact the mark-to-market accounting for this says you take the profit earlier. You don't take it in the summer. 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 Feb. 28. 2008 / 9:00AM, SFD - Q3 2008 Smithfield Foods Earnings Conference Call We have made this comment in other quarters. This profit does not the get reflected. It is just like marketable securities, every day to market. So if the grains go up, you pick those profits up in the quarter in which they are reflected in the market, not the period in which you eat the grain. I know that was a complicated answer. Pablo Zuanic - JPMorgan - Analyst No, that's fine. Thank you. Just a follow-up on the pork processing side, obviously, very, very strong numbers, even compared to the quarter before. I realize January is probably the most favorable seasonally speaking for pork processing. But I'm just trying to get a sense, was a big delta there on the fresh side or on packaged food side? Obviously, both benefit. I always thought there was more stickiness on packaged food than on cut-outs, so with $37 hogs the back of that delta in terms of earnings has to be coming on the packaged meat side. Can you walk us through that? Larry Pope - Smithfield Foods Inc. - President, CEO Pablo, I would tell you for the quarter that the big improvement over the same quarter last year, the 100 to 99.6 to the 221.5 I would tell you a good portion of that came on the fresh meat side of the business. We got it on both sides. Let's be very clear. We got it on both sides. But the fresh meat business was very good for the quarter. And we had more hogs. We had the Premium Standard Farms volume in there which increased the volume about 35% -- well, I think our volume increased 35%. A couple of things. We had the PSF addition to the organizational, those two plants, and we ran the plant every Saturday. And we ran a Sunday. So in good cut-outs, we took advantage of running these plants over 100% of capacity. So we got nice, nice pick-ups on the fresh meat side. This export business has been very good to us in many countries because of the cheap U.S. dollar. My gosh, with the euro went to $1.51 today. That cheap U.S. dollar is helping these exports and helping the margins on these exports. More than 50% of this came from fresh pork, but packaged meats was always very good. Pablo Zuanic - JPMorgan - Analyst Thank you. Larry Pope - Smithfield Foods Inc. - President, CEO Okay. Operator Our next question comes from the line of Jonathan Feeney with Wachovia. Please go ahead. Jonathan Feeney - Wachovia Securities - Analyst Good morning. Thanks. Larry, I keep thinking about how different this Q3 is compared with what had previously been the worst quarter for hog production ever, which was the January '03 quarter, and more importantly, what that means for your P&L when hog prices start to inevitably reflect these high grain prices, whenever that is. So correct me if I have any of this wrong. 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 Feb. 28. 2008 / 9:00AM, SFD - Q3 2008 Smithfield Foods Earnings Conference Call But by my calculations your quarterly loss per head in hogs is actually roughly comparable to what it was in the last trough five years ago. You have a little higher out loss because you're killing about a million more hogs with the premium per quarter, with the Premium Standard. What i really want to get at is the huge difference is in pork where you have almost tripled or $150 million more profitability than you had back then. So I want to know about how much of that difference, do you think, is the packaged meats volume, where you have almost doubled when you largely bought that from Con Agra and Sarah Lee versus just kind of getting lucky on fresh pork margins. I don't know if you view it as lucky or not, driven by exports, et cetera, how much of that pork profitability which is enormous right now do you think can stick around when we eventually see higher hog markets? Larry Pope - Smithfield Foods Inc. - President, CEO I guess I would tell that you we have been, I would say, I'll try not to say we got lucky, either. Jonathan Feeney - Wachovia Securities - Analyst (laughter) Skill. Larry Pope - Smithfield Foods Inc. - President, CEO It was a very good fresh meat, it was a very good fresh meat environment. Exports have been very good. I know I have said this 14 times now. That has helped that fresh meat complex. And this rapid decline, rapid decline in hog prices very sharply last fall put good margins. But we saw margins in January in fresh pork like we have really never seen. Jonathan Feeney - Wachovia Securities - Analyst Okay. Larry Pope - Smithfield Foods Inc. - President, CEO I would tell you, unfortunately, in February they have fallen off quite a bit. But the one of the big pushers here is this packaged meats business. We have been now into this for several years. I have been talking about it for now every single quarter. That is a much more stabilizing and a growing piece of this business. Now, we will have to see. This is going to -- we are going into a new world here. We have never been into a paradigm of north of $55 raising costs which is going to translate into meat prices that we have never really seen before on a longer term basis. We have seen $60 hogs before. All of us in this industry have seen $60 hogs. We survived in $60 hog environments. If these grains are going to stay where they are at, if this government policy is going to stay where it's at, we are going to have to see meat at levels that we only saw when hogs saw those summertime $60 prices. America can pay it, and I've made the comment a number of times, if that is what this government has decided higher food costs, which would have to go up maybe 15% or 20% at least in the protein side of the business, if that has to go up and that is the cost of becoming more independent from foreign oil, I guess that is the price Americans are willing to pay. But Americans have paid it before, so it is not like we are going to be selling $3 or $4 gasoline. They have seen these prices before and the consumer can consume it. The other side of that is we have put enormous effort on this packaged meat side of the business. The convenience products are growing very nicely. They are a nice margin. 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 Feb. 28. 2008 / 9:00AM, SFD - Q3 2008 Smithfield Foods Earnings Conference Call Standing margins are very good in that. We are rationalizing out capacity, getting our cost well under control and utilizing our plants much more efficiently from a utilization. That is a big part, a very substantial part of what you are seeing as you see this pork segment continue to be a very good contributor to the bottom line. Jonathan Feeney - Wachovia Securities - Analyst When you say very substantial, Larry, sorry to be a nitpicker here. Would you say more than half of that sort of $150 million delta from the last trough was the fresh pork margins? Was it more than half the -- Larry Pope - Smithfield Foods Inc. - President, CEO I was going to say more than half of that is the packaged meats margin, all right? Jonathan Feeney - Wachovia Securities - Analyst Okay. Thanks so much. Larry Pope - Smithfield Foods Inc. - President, CEO You are welcome. Operator Our next question comes from the line of Farha Aslam with Stephens, Inc. Please go ahead. Farha Aslam - Stephens, Inc. - Analyst Hi. Good morning. Larry Pope - Smithfield Foods Inc. - President, CEO Hi, Farha. Farha Aslam - Stephens, Inc. - Analyst On the beef numbers, your quarter-to-quarter numbers have varied pretty significantly in terms of profitability. If we had to kind of think of that business going forward, what would you think a good range would be for us to think about that? Larry Pope - Smithfield Foods Inc. - President, CEO (laughter) That is a wonderful question. I wish I knew what the beef business was going to do going forward, Farha. I mean, I guess, I would yield more to the Tyson people, who have more experience and are much bigger than this. I mean, this business has had some seasonal pretty good periods here even in the last 12 months. I think this business can continue to be cloudy and crummy, until these export markets open up. Because the cattle side of the business, the beef side of the business is feeling the impact of this grain just like the pork side is. So beef prices have got to go 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.
  21. 21. FINAL TRANSCRIPT Feb. 28. 2008 / 9:00AM, SFD - Q3 2008 Smithfield Foods Earnings Conference Call up, too. So beef has got to go through the price adjustment as we have all got to go through. I think beef could continue to be tough for a good while, Farha. Farha Aslam - Stephens, Inc. - Analyst So tough is kind of current profitability around $12 million? Or more like $3 million? Larry Pope - Smithfield Foods Inc. - President, CEO I was going to say that I don't think, I don't see us necessarily going into a loss situation. But I was going to say that zero to $15 million range. Farha Aslam - Stephens, Inc. - Analyst Okay. My follow-up would be, on the European meat side, are you seeing any let up in the competition? Or should we anticipate that competitive activity going forward? Larry Pope - Smithfield Foods Inc. - President, CEO It's tough. I have said a number of times, France may be the toughest market in the world to do business in. And that's more than 50% of our business in western Europe is in France. That is a very tough margin. I think that that's -- we have got, we have got to make some tougher decisions in that market in terms of our plant operations. It's been good for the last 12 months. The merger of this whole Group Smithfield deal has been very good for Smithfield. We were not doing well at all. We are still making decent money in that market. Not making what I think we should be making. I think it will continue for some time here, Farha. I do think it will. I think our earnings, we'll still have earnings, I just think they won't be where they were 12 months ago. Farha Aslam - Stephens, Inc. - Analyst Thanks for the color. Larry Pope - Smithfield Foods Inc. - President, CEO You're welcome. Jerry Hostetter - Smithfield Foods Inc. - VP, Investor Relations Operator, we've got time for one last question, please? Operator Thank you, and our final question comes from the line of Tim Ramey, D.A. Davidson. Please go ahead. Oh, one moment. Mr. Ramey, please begin again. We just got your line open, sir. www.streetevents.com Contact Us 20 © 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.
  22. 22. FINAL TRANSCRIPT Feb. 28. 2008 / 9:00AM, SFD - Q3 2008 Smithfield Foods Earnings Conference Call Timothy Ramey - D.A. Davidson & Co. - Analyst Good morning. Are you willing to say what the net impact of mark-to-market hedges was in the 3Q? Just looking at both hogs and grain and anything else you hedged? Larry Pope - Smithfield Foods Inc. - President, CEO Yes, my guess is you get up early, too? Timothy Ramey - D.A. Davidson & Co. - Analyst Every day. Larry Pope - Smithfield Foods Inc. - President, CEO I don't want to go there on that. You can make your own calculations. I think there is some, if you look at the hog production costs and such, if you'll look at the hog production paragraph or such, and you'll have some information in the 10-Q. But I do for the want to get into a discussion of mark-to-market. Tim, there's more to it than even just the hedge position. We take [forward] grain positions on a cash basis with farmers, and so it is a complicated question. Even mark-to-market only answers one piece of it. So I think, my quote I have said to you guys is judge us on the numbers, the good and the bad, and I won't use mark-to-market as a crutch, and I won't use it as a benefit. Judge us by the numbers. Timothy Ramey - D.A. Davidson & Co. - Analyst Just to follow-up on the Romania/China comments. I think it was three years ago, at [Cagney], I thought yours was maybe one of the most visionary presentations talking about Romania. A lot of that still remains a vision for Smithfield, not a reality. So when you are starting to at least consider putting assets on the ground in China, does the Romania experience color your view or inform your view in any way? Larry Pope - Smithfield Foods Inc. - President, CEO Well, I guess we had, I mean, Romania, let's be clear. I'm very please pleased that we have had the bump we have had here from the manufacturing and processing side. I've been very pleased with that side of the business. The fact that we have gone in and starting in a very significant way to convert that from a carcass market to a cut market and we are delivering fresh product into the marketplace. We are doing a very good job there, Tim. I think Romania continues to have the promise we thought it did. The issue is it's got classical swine fever. We were going at a very fast pace there to get those farms in. Oh, I think we did what we could do from a security stand point, and a bio-security standpoint. We have gone back and said we need to do more. That is a country we need to be more. And when I talk about China, that's why I made the comment a few minutes ago about the CapEx. China's going to be a deliberative process. We are going to look at that with our eyes open, having been to Poland, Mexico, and Romania. We have www.streetevents.com Contact Us 21 © 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.
  23. 23. FINAL TRANSCRIPT Feb. 28. 2008 / 9:00AM, SFD - Q3 2008 Smithfield Foods Earnings Conference Call a lot of background now in terms of doing business outside of the United States. We are going to look at that market smartly and hopefully if it makes sense to be there we'll be there. We are going to be there on a basis that it's sustainable long term and it is, Tim. For those on this call who have been there, it is, I don't need to say much to you. For those who haven't about been there it is eye opening just from the time you come in for approach on landing. You say my goodness gracious this world has really changed. Those folks like the product that we produce. So you are going to a place that enjoys the product and you are going to a very cooperative government. The government there is part of industry. They are not anti-industry, they are part of industry. They are your friend. In many countries, including in the United States sometimes, the government's not your friend, it's almost your enemy. In China, the government is your partner and your friend. So you have to do it smartly and we are going to do it smartly. Today I don't have enough information to tell you that it makes sense to be there. But I have enough information to tell you that we ought to look at whether it makes sense to be there. And I think we have a lot background now and knowledge that can make us make much better decisions there and understand what the realities are of doing business in that country. Timothy Ramey - D.A. Davidson & Co. - Analyst Thank you. Jerry Hostetter - Smithfield Foods Inc. - VP, Investor Relations Thank you for your time and answers today. I'm sorry there were several analysts in the queue that we did not get to, but we are out of time. Thanks very much. Operator And ladies and gentlemen, that does conclude your conference for today. Thank you for your participation, and thank you for using AT&T Executive Teleconference Service. 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. 1769849-2008-02-28T17:07:06.663 www.streetevents.com Contact Us 22 © 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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