Smithfield Aug 25, 2015 (Thomson StreetEvents) -- Edited Transcript of Smithfield Foods Inc earnings conference call or presentation Tuesday, August 25, 2015 at 1:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Keira Lombardo Smithfield Foods - SVP, Corporate Affairs * Ken Sullivan Smithfield Foods - EVP & CFO ================================================================================ Conference Call Participants ================================================================================ * Dave Cook Wells Fargo Securities, LLC - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Ladies and gentlemen, thank you for standing by, and welcome to the Smithfield Foods 2015 second-quarter results conference call. (Operator Instructions) As a reminder, today's call is being recorded. I'll turn the conference over to Mr. Keira Lombardo, Senior Vice President of Corporate Affairs. Please go ahead. -------------------------------------------------------------------------------- Keira Lombardo, Smithfield Foods - SVP, Corporate Affairs [2] -------------------------------------------------------------------------------- Good morning and thank you for joining us today for Smithfield Foods conference call for the second quarter of 2015. Joining me today on our call today is Ken Sullivan, Executive Vice President and Chief Financial Officer. 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 the calendar year 2014. You can access the 10-K on our website at smithfieldfoods.com. I'll now turn the call over to Ken. -------------------------------------------------------------------------------- Ken Sullivan, Smithfield Foods - EVP & CFO [3] -------------------------------------------------------------------------------- Good morning, Keira. Good morning, everybody. Thank you for dialing in to hear our interim report for the second quarter. In terms of prepared remarks, I'll be brief. We filed our second quarter 10-Q two weeks ago. That document is far more expansive than I could hope to be on this short call this morning, so I'll simply summarize our Q2 2015 results, and then we can take some questions. All comparisons are to the comparable period last year, and all numbers are on a US GAAP basis. Here are the numbers -- sales totaled $3.487 billion compared to last year's $3.814 billion. Sales volumes were up across the Board. We sold more packaged meats. We sold more fresh meat. We marketed more live hogs, yet sales dipped. This is a reflection of lower price levels. The entire value chain is seeing lower price levels this year, particularly as it compared to 2014 when we had extraordinarily high valleys across that same value chain. In addition, the strong US dollar affected measurement of sales. FX translations negatively impacted sales by approximately $80 million in the quarter. On a year-to-date basis, the same factors are at play. Sales for the six months ending June 2015 totaled $7.1 billion compared to $7.2 billion the previous year. Adjusting for the FX translation effect, sales on a constant dollar basis actually would have about equaled last year's record. The FX translation headwind for the six-month period was about $130 million. Putting it all together, you can summarize sales this way: more sales volume, lower unit values and some headwind from the strong dollar. Operating profit: operating profits total $186 million compared to last year's record $260.2 million. That's a decline of approximately $74 million. Our packaged meats profits were, again, the bright star with Q2 operating profits totaling $176 million compared to $98 million last year. The value-added branded CPG aspect of our business is performing exceptionally well, and we are pleased with that part of the business. Indeed, Smithfield's packaged meats business was the fastest-growing CPG company over the last 52 weeks, according to the last IRI data that I've seen. This year the challenge has been more on the commodity dependent side of our business, the parts of the business we have less control over; in particular the live production side. Lower prices in this part of the business has made keeping pace with last year's record results challenging, although a little more context on that in a minute. Pretax profits for Q2 totaled $155.3 million versus $219.8 million last year. On a year-to-date basis, our pretax profits totaled $309 million when adjusted for the $12.8 million early debt extinguishment charge we took in the first quarter. This compares to $377 million last year. While these results are below last year's record level, a little context is important. The first six months of 2015 are actually the second best first six months in Smithfield's history. So when evaluating our results, it is important to remember just how good 2014 was. Considering the market dynamics created by significantly increased supply, sharply lower pig prices, meat prices, and FX translations, our operating results are not unexpected. Fortunately the performance of our branded packaged meats business has offset the commodity aspects and allowed us to record profits that when viewed in historical terms are solid in total. Net income for Q2 totaled $104.2 million. That's up from the $97 million we made in the first quarter of 2015, but down from the $142.9 million we made in Q2 of 2014. On a year-to-date basis, net income totals $201 million, inclusive of the $12.8 million early debt extinguishment charge we took in Q1. That compares to $248 million in last year's record year. When you add back the early debt extinguishment charge, that puts us about $39 million below last year's record first half. Again, at the bottom line, the first six months of 2015 represent the second-best January through June in Smithfield history. All things considered, not a bad result. Clearly we have opportunities in front of us. We understand that, and our new one Smithfield management team is at work identifying the opportunities and developing execution plans to further improve our profits and competitiveness. In terms of segment performance, let me touch on a few points. The shift that started in Q1 continued into Q2 with more profits coming from our packaged meats business and less from each of the other segments. I highlighted this shifting theme in our first-quarter call as something we expected to play out over the remainder of 2015 and, indeed, it has. In a business we are predicting as difficult, the big picture guidance is to expect lower earnings from our international hog production divisions, but better performance year over year in our packaged meat division. Fresh meat has been a tough slog, but we are coming into a better part of the year, and we hope to improve our performance in that end of the business finishing out the year. In terms of Q2, our packaged meat segment had another outstanding quarter. Packaged meats profits totaled $176.3 million, up nearly 81% from the prior year total of $97.5 million. Our operating profit margin was a robust 11%, and volume is up nicely year over year. As we've repeatedly said, the trend line is moving inexorably higher. We are building a formidable, branded consumer packaged goods business, full stop. Fresh pork showed a loss in Q2 of $15.1 million compared to a profit last year of $29.7 million. The story here is we have 8% to 10% more hogs, and industry exports are down at the same time. We have a lot more meat to deal with this year. Too much meat equals lower profits. It's really not more complicated than that. Hog production turned a corner after the losses in Q1 and clocked profits in the second quarter of $29.7 million. That's the good news. The bad news is the comparison to last year's record profits, which totaled $129 million. If you recall, last March began a meteoric rise in hog prices as supply fears related to PED took hold. So last year was a blowout quarter in live production. This year we made money, just not as much of it. We had solid contributions from our hedging programs in Q2, but [pers] put a dent in our raising cost. Turning to international, our international profits totaled $14.8 million compared to $30.7 million the previous year. As in Q1, international hog production was a major contributor to earnings last year, and lower prices -- lower pig prices in the EU and Mexico have slowed earnings in that segment. The big news in the international segment is that we sold our 37% stake in Campofrio Food Group. CFG simply wasn't meeting our investment targets and was no longer central to our European strategy, which is now focused on Eastern and Central Europe. In terms of financing costs, interest expense continues to tick lower. Interest expense was $31.5 million for the quarter compared to $40.4 million last year. This reduction reflects our ongoing debt reduction efforts, as well as strategies our finance team has employed in an effort to constantly lower costs. EBITDA: EBITDA in Q1 was approximately $245 million. On a trailing 12-month basis, EBITDA remains well over $1 billion, at $1.070 billion, inclusive of the $12.8 million early debt extinguishment charge. Let me turn to the balance sheet. We continue to have what I described as a healthy balance sheet. Our leverage ratios are still hovering around 2 times, our debt to cap is around 35%, our net debt to cap is around 30%, and we are covering interest nearly 7.5 times. During the second quarter, we repaid $147 million of debt to reduce our outstanding gross debt to $2.292 billion. During the first six months of 2015, we've reduced debt by $435 million. We've used cash on hand and, of course, earnings to repay both bank debt and public bonds. We've repaid over $1.1 billion in debt since the merger with the WH Group/Shuanghui just 21 months ago as measured from June. Liquidity, again, continues to be a non-issue. We had more than $1.6 billion of global liquidity, including invested cash at the end of June. We have no meaningful debt maturities anywhere on the horizon, and liquidity is, again, a non-issue. A couple of other odds and ends. CapEx totaled $78 million in Q2, the pace having accelerated over Q1 levels. This acceleration should continue over the last half of the year. Our capital budget for 2015 is between $350 million and $380 million. While we won't get all our projects complete, I still expect CapEx to be in the $350 million range. Appreciation and amortization for Q2 was $58.3 million, a small increase over last year's $57.1 million. I expect full-year depreciation and amortization to be in the $235 million range. There are no covenant issues, and so with that, I think that provides a recap of the Q2, and we certainly can take some questions now. -------------------------------------------------------------------------------- Keira Lombardo, Smithfield Foods - SVP, Corporate Affairs [4] -------------------------------------------------------------------------------- Great. Thanks, Ken. Operator, please open the lines for questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions). Bryan Hunt, Wells Fargo. -------------------------------------------------------------------------------- Dave Cook, Wells Fargo Securities, LLC - Analyst [2] -------------------------------------------------------------------------------- Good morning. It's actually Dave Cook on for Bryan. A couple of questions from us. Looking at the latest Nielsen data, you are showing meaningful increases in volumes, most notably in bacon and sausages. Are you facing any capacity constraints there? -------------------------------------------------------------------------------- Ken Sullivan, Smithfield Foods - EVP & CFO [3] -------------------------------------------------------------------------------- I would tell you this, David. We are certainly pleased with the performance of our bacon operations, and we have been growing volume, and we are pleased that you take note. What you see in the IRI data are pretty impressive, and what I would also tell you is that we are investing actively in the bacon area. And so right now we're fine, but we are certainly investing for future growth in that area and putting a fair amount of dollars behind it. -------------------------------------------------------------------------------- Dave Cook, Wells Fargo Securities, LLC - Analyst [4] -------------------------------------------------------------------------------- Okay. And can you talk about the latest you are seeing with regard to Chinese demands given their recent sow liquidation? -------------------------------------------------------------------------------- Ken Sullivan, Smithfield Foods - EVP & CFO [5] -------------------------------------------------------------------------------- Yes, the whole China situation is an interesting thing, right? Initially earlier in the year, we heard numbers of 6 million sow liquidation, and I read something last week that suggest it was 10 million sows. So anytime you talk about 6 million to 10 million sows taken out -- I think I have said this in the past -- that's the equivalent -- more than the equivalent of the entire US industry. And so we certainly are seeing demand from China. I will tell you we may be different from our counterparts or others in the industry. Our volume to China is up very strong on a year-over-year basis. Through the first six months, we are up more than 45% in our shipments to China, and that has a lot to do with our affiliation as a wholly-owned subsidiary of the WH Group and the trade channels that we're trying to establish repeatable business through the export channel into China. And so what do I expect? Yeah, I expect there is increasing demand from China. Certainly the price levels there have gone up pretty significantly over the last, call it 30 to 45 days, and the difference between the US price and the China price, that gap has widened since the last time we had a call in Q1. So that makes it all the more favorable for trade. Now the overarching macroeconomic conditions in China is still a bit of a question mark, and obviously all the market turmoil over the last few days, we're watching just as everybody else is. But what I can tell you is that we've got a distribution channel through our sister company and through some trade mechanisms worked out with them that we are happy about and have obviously contributed to our own volumes being up year over year. -------------------------------------------------------------------------------- Dave Cook, Wells Fargo Securities, LLC - Analyst [6] -------------------------------------------------------------------------------- Okay. And can you provide an update on the One Smithfield initiative, whether progress you've made or maybe any change in expected savings or timing? -------------------------------------------------------------------------------- Ken Sullivan, Smithfield Foods - EVP & CFO [7] -------------------------------------------------------------------------------- Yes, again, the One Smithfield initiative, I think, is the most exciting thing that we've got going on here at Smithfield, all things considered. And I've said before that I expect the savings from One Smithfield to come from manufacturing from transportation and logistics from the sales process -- the front-end sales process -- and ultimately managing our brands in a more cohesive way. I would tell you without putting numbers to it, I think we are seeing the benefit this year even of the One Smithfield initiative. I think that may be particularly true on the sales side. I think we've still got a lot to come on the manufacturing and distribution side, and I think I've also mentioned to you that we are making an effort to harmonize or combine all our ERP systems in the US into a singular system. That will be a catalyst to extract some of these savings that I'm talking about on the manufacturing and the transportation side. So what I would tell you is we're pleased with the momentum that we've generated with One Smithfield. I've said in the past I fully expect that we can improve our margin structure by 100 to 200 basis points. I stand by that. I think that you will see that evolution or that trend move upwards. From this year through 2017, we will be fully up and going on our one instance project of SAP. So I would expect it to come -- I don't know that it's ratable through that time period, but certainly over the next 18 to 24 months, we expect to see it. -------------------------------------------------------------------------------- Dave Cook, Wells Fargo Securities, LLC - Analyst [8] -------------------------------------------------------------------------------- Okay. And then the last one for me, can you provide an update on the last conversation you had with the rating agencies and maybe talk about your rating goals? -------------------------------------------------------------------------------- Ken Sullivan, Smithfield Foods - EVP & CFO [9] -------------------------------------------------------------------------------- I would answer that just in very broad terms. We have ongoing regular dialogue with the ratings agencies, and Tim Dijkstra, who is our Treasurer, I think deserves lot of credit for that. Tim was formerly at Chrysler and had very good experience with the ratings agencies, and it's really helped us build our relationships at both Moody's and S&P. In fact, I would tell you we are going to have the ratings agencies here this week. So obviously from a rating standpoint, we are always looking to improve. I'm not uncomfortable with our leverage levels by any stretch of the imagination. I think we are totally comfortable with where they are, but the direction we've received thus far from the WH Group has been to continue to focus on debt reduction. Obviously if we continue to do that, we do have an expectation that our ratings could improve, but we're also going to be looking for growth. So we'll see as the next year unfolds which direction we take there. -------------------------------------------------------------------------------- Dave Cook, Wells Fargo Securities, LLC - Analyst [10] -------------------------------------------------------------------------------- Okay. I appreciate your time. Thanks. -------------------------------------------------------------------------------- Operator [11] -------------------------------------------------------------------------------- (Operator Instructions) -------------------------------------------------------------------------------- Keira Lombardo, Smithfield Foods - SVP, Corporate Affairs [12] -------------------------------------------------------------------------------- It appears there's no more questions at this time, so we will go ahead and end the call. Thank you, operator. -------------------------------------------------------------------------------- Operator [13] -------------------------------------------------------------------------------- Thank you. Ladies and gentlemen, this conference is available for replay. It starts today at 11:00 a.m. Eastern time and will last until September 8 at midnight. You may access the replay at anytime by dialing 1-800-475-6701 or 320-365-3844. The access code: 366398. Those numbers, again: 800-475-6701 or 320-365-3844. And the access code: 366398. That does conclude your conference for today, and we thank you for your participation. You may now disconnect.
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