Smithfield Foods' CEO Discusses F1Q2013 Results - Earnings Call Transcript

Smithfield Foods Inc. (SFD)

Q1 2013 Earnings Call

September 4, 2012 9:00 am ET

Executives

Larry Pope – President, Chief Executive Officer

Bo Manly – Chief Financial Officer

Keira Lombardo – Vice President, Investor Relations, Corporate Communications

Analysts

Farha Aslam – Stephens Inc.

Ken Zaslow – Bank of Montreal

Christine McCracken – Cleveland Research

Brett Hundley – BB&T Capital Markets

Diane Geissler – CLSA

Akshay Jagdale – Keybanc

Robert Moskow – Credit Suisse

Vincent Andrews – Morgan Stanley

Ryan Oksenhendler – Bank of America Merrill Lynch

Tim Tiberio – Miller Tabak

Reza Vahabzadeh – Barclays

Carla Casella – JP Morgan

Presentation

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Smithfield Foods Fiscal 2013 First Quarter Earnings call. For the conference, all participants are in a listen-only mode. There will be an opportunity for your questions. Instructions will be given at that time. If you need any assistance during the call, please press star then zero. As a reminder, today’s call is being recorded.

With that being said, I’ll turn the conference now to Ms. Keira Lombardo. Please go ahead.

Keira Lombardo

Good morning. Welcome to the conference call to discuss Smithfield Foods’ Fiscal 2013 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 Company’s 10-K for fiscal year 2012. You can access the 10K and our press release on our website at Smithfieldfoods.com.

On our call today are Larry Pope, President and CEO, and Bo Manly, CFO. This is Keira Lombardo, Vice President of Investor Relations. Larry will begin our call this morning with a review of operations, followed by Bo who will review the Company’s financial results. Then Larry will provide our outlook for the future, after which the line will be opened for questions.

Larry?

Larry Pope

Thank you Keira, and thank you all for joining the call this morning. I hope each of you had a good Labor Day holiday enjoying time with your families, as I did. I even hope you had some time to throw out some hot dogs or pork chops, or maybe some barbecue ribs. If you did, I sure hope they were ours.

Today we are reporting fiscal first quarter earnings of 61.7 million or $0.40 a share compared with 82.1 million or $0.49 a share last year. I remind you that last year’s first quarter included some charges that mean on an adjusted basis last year’s first quarter earnings were comparatively $0.69 a share instead of $0.49. These charges included a significant charge related to some outstanding Missouri litigation. I hope you saw in the release that we have now settled that litigation. After quarter’s end, we made all the agreed upon payments to the plaintiffs’ attorneys. This effectively resolves a major issue that has lingered since the PSF acquisition.

I also hope that you saw that we have continued to strengthen the balance sheet with a new debt financing. This financing effectively clears the overhang surrounding debt issued a few years ago and repositions our company’s balance sheet. Bo Manly will speak to this issue in his comments.

On the operating side, our results reflect the ongoing turmoil in all protein and grain-based businesses today, high volatility and increasing cost of production primarily tied to higher grain costs. Just three months ago, corn was below $6 a bushel and trending downward. Experts were forecasting a record corn crop in the area of 15 billion bushels. Remember that? Our hedge positions didn’t look so good at that time. Now just a few months later, corn has reached new records highs, soybean meal continues to move even higher, and the crop estimates have been reduced by nearly a third. Suddenly, our hedge positions make us look like we were all geniuses. I promise you, we were not – just executing our strategy to control cost.

This uncertainty surrounding hog production is why we changed our hedging philosophy and practices a few years ago. We can’t predict the future and don’t try. We hedge to control cost and manage our hog production margins. This is not easy. Sometimes the futures markets simply don’t provide the opportunity, but we are trying to take some volatility out of our hog production earnings.

I am pleased to report that hog production raising business was profitable for the first quarter and looks to be break-even or a small to modest loss for the full fiscal year. Our second and third quarters will likely reflect losses as a result of expected seasonally lower live hog prices; however, we suspect our results will be substantially better than the industry average as a result of our favorable corn and soybean meal positions we have spoken about so many times.

Our fresh pork results this quarter were disappointing. We did not have a good quarter in fresh pork. As most of you know, the summer months are generally the worst months of the year for fresh pork, and that was the case this year. Last year’s strong results were an exception to historical norms. The influence of high-priced product combined with 2 to 3% more meat to sell and sluggish retail demand all adversely affected our sales margins, particularly in the month of July. In addition, we suffered from losses tied to our export business resulting from a couple of plant de-listings. These things happen from time to time in the export arena. These issues have been largely resolved and we are again shipping most of the affected products. While I’m not nearly satisfied with this quarter’s results, I am not really worried about fresh pork and fully expect fresh pork profitability to be fine for the year.

While I was not happy with our fresh pork results, I am especially pleased with our packaged meats results. This quarter’s results were a record for any first quarter. The business continues to be a strong focus of the management team quarter after quarter and year after year. We continue to increase our marketing spend double digits in what we believe is a smart and focused way. A 7% growth in our branded business and 4% overall is very encouraging, particularly given the macro environment. We have significant growth in a number of our 12 core brands which we spelled out in our press release. We also had significant grow in a number of product categories. The fact that we had strong growth in volume combined with strong growth in margins is very encouraging. Certainly modestly lower raw material costs helped, but this business is performing well.

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