Smithfield Foods Inc (SFD) 2014 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to Smithfield Foods' 2014 fourth-quarter and full-year results. (Operator Instructions). As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Ms. Keira Lombardo. Please go ahead.

Hello and thank you for joining us today for Smithfield Foods' conference call for the fourth-quarter and full-year 2014. On our call today are Ken Sullivan who was recently promoted to the title of Executive Vice President in addition to his current role as CFO. Also joining us are Scott Saunders who was recently promoted to President of our Fresh Pork Division, and Gregg Schmidt who continues to lead the Livestock Production subsidiary of Smithfield as President of our Hog Production Division.

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 will now turn the call over to Ken.

Thank you, Keira, good morning, everybody, thank you for dialing in. 2014 was a wonderful year for Smithfield, so it is a pleasure to come on here this morning and entertain questions about what was the best year in Company history. I am delighted to have Scott and Gregg join me this morning. Both Scott and Gregg are well-respected industry veterans with more than 60 years of combined experience between them. We are lucky to have them.

Scott and Gregg are here for a reason; this is the first quarterly call since Smithfield announced our new organization structure, what we are calling the One Smithfield structure, in which we eliminated our independent operating companies and combined all our operations into four cohesive operating divisions.

Quite simply, we abandoned our IOC model, which tended to foster silos, in favor of putting all our segment operations under common management control. The IOC model served Smithfield well for a lot of years but it had run its course. Change was essential for us to realize the full potential of our global organization.

Larry and I both believe the One Smithfield structure will allow us to realize the full potential of Smithfield Foods. We think it will be a real catalyst for profit improvement as we are now much better positioned to optimize our sprawling manufacturing platform, which incidentally we have 40 plants in the US and another 10 or so internationally.

We think we can take cost out of logistics and distribution. We think we can better manage the front end of our sales process and allow us to manage the crown jewel, which is our brand portfolio, in a more cohesive strategy. So Scott and Gregg are here today so that we can begin to showcase our new management team and to give you, the stakeholders in Smithfield, access to them.

In terms of prepared remarks I only have a few. We filed 10-K on March 25, so I will assume you have digested our financial statements and MD&A. Therefore, for purposes of this call, I will dispense with the customary if not perfunctory reading of the numbers. I will simply recap at a very high level the key figures and themes for 2014.

I think you appreciate the 10-K that we filed three weeks ago contains more detail than I could possibly hope to cover in this call so I won't try. With that let me see if I can summarize our 2014 results, then we will take questions.

Let's start with the idea that 2014 was a record year for Smithfield Foods. Our sales topped $15 billion for the first time ever, that is over a $1 billion increase from the prior year. I can't help but point out a little anecdote here.

Many of you know Larry Pope, our CEO, was formerly the CEO. Larry has shared with me, on a number of occasions, financial statements from the 1980s in which we showed the revenue numbers and I would tell you I think we are clocking more sales in one day now than we did for the entire year in the late 1980s. So $15 billion is a remarkable number and we are pleased to have topped that point this year.

Operating profits increased 175% to $932 million, which is a record. That is up from $333 million last year -- sorry, $339 million last year. Pretax profits totaled $773 million versus $156 million last year, nearly a fivefold increase. Net income for 2014 totaled $556 million, a record versus $121 million last year.

Profits were up in every segment of the business: packaged meats' profits totaled nearly $460 million, that is up 22% from the prior year; fresh pork profits totaled $97 million, up 33% from the prior year; hog production profits totaled $344 million, a turnaround of over $365 million year over year. International profits totaled $156 million versus $61 million in the prior year, that is an improvement of 158%.

In terms of financing cost, interest expense for the full year was $159 million or $21 million below 2013. EBITDA in 2014 totaled a record $1.16 billion; this is double the $581 million of EBITDA for 2013.

In terms of the balance sheet, in a word it is healthy. I can rattle off the metrics to you: net debt was $2.3 billion at yearend; our net debt to capital was 34%; our net debt to adjusted EBITDA was just about 2 times; and liquidity certainly was -- let's call it very healthy at $1.7 billion.

We are deleveraging very, very quickly. In fact, we have less debt today bringing you current through today than we did at the date of the Shuanghui merger just 18 months ago. Since yearend we've continued to execute on reducing our financing cost.

In February we repurchased $258 million of our long-term notes. The $275 million tender price was funded with available cash and borrowings from our securitization facility and in process we executed a more than 5% interest rate arbitrage. As of today all but $20 million of the borrowings on the securitization facility have been repaid.

The transaction will save the Company $12 million annually in lower finance costs after we take a onetime was on debt extinguishment of about $12.8 million. You can expect that in the first quarter of 2015.

Liquidity, as I mentioned, $1.7 billion. It is simply a non-issue. We have no meaningful debt maturities anywhere on the horizon and we expect to be in a strong liquidity position for the foreseeable future.

I should point out that we also renewed our $1.25 billion asset based inventory revolver just a week or two ago. That facility now extends through May of 2020. And I refer you to our press release on April second for more details on that transaction.

But the short story is that it also provides us for an accordion of $375 million of additional capacity, a foreign currency sub facility equivalent to $100 million and an increase in swing line borrowings of $50 million to $150 million.

A few other odds and ends -- CapEx for 2014 totaled $301 million. Our budget for 2015 is $380 million and includes a number of exciting projects both in our plants and on our farms. We are very excited about the paybacks that we have coming with these investments in the business.

Depreciation was $231 million for 2014. You can expect that to be in the $235 million range for 2015.

I think that provides a quick summary of 2014. As I said, all of this is already covered in the 10-K that we filed a few weeks ago along with all the management discussion and analysis of the results. So with that, Keira, I think we should open it up to questions. Certainly Gregg and Scott are here and available for some questions. So let's take some calls.

Great, thanks so much, Ken. Operator, please open the line for questions.

(Operator Instructions). Carla Casella, JPMorgan.

I have a question about the M&A environment and whether you are looking for opportunities in the US on the packaged foods side to augment your business.

Thank you, Carla. The direction we have from the WH Group is to focus on debt reduction and I think we have done that very well. As I said a moment ago, our balance sheet really is in great shape.

I would tell you, Carla, that in the 18 months since the merger our focus has been on that debt reduction. I do think we are quickly approaching the point where we can afford to be looking externally at opportunities.

Certainly in the Packaged Meats that is our focus and we are committed to growth in that end of the business both organically and, if the situation is right, through acquisition. So I would tell you that while we were inward focused for a long period of time I think we are now able to look outward.

And are there many opportunities out there to look at? Is it mostly smaller producers or are there -- are you just waiting to see what could come available?

Yes, I wouldn't want to comment sort of specifically on any particular opportunities that are out there. Obviously there are the things that circulate from time to time. But, Carla, we don't have any particular -- or set sight on anything. As I said, this is a situation that is evolving as we have improved the balance sheet and we will work strategically with the WH Group to ultimately focus in on the future.

Okay, great. And then on the pork supply side or hog supply side, can you just talk about -- now that we are rebounding from the PEDv trough, are we going to be back to levels (inaudible) -- do you see getting back to levels of supply of like 2011/2012 type level or how should we think about supply?

Yes, clearly supply will be up year over year. You see the same things that we see; certainly we see it in our business on a day-to-day basis. We think that supplies will be up anywhere from 5% to 8% just consistent with what the industry pundits put out there. So the industry is going to have to deal with that.

I would tell you from our standpoint we are actively working with WH Group on our export programs. One of the things that I think can help the entire complex in the US obviously is the exports. And last year our exports were up 6.8%. We are obviously going to have more meat this year and going to need to get that out of the country.

We have got the perfect channel with the WH Group to build a repeatable, sustainable export business and we are working on a pretty exciting program right now as we speak to really significantly increase our exports year over year.

Certainly 2014, as you might appreciate, was not entirely conducive to the US China trade, the idea being that we had very high prices in the US and relatively lower prices in China. And that is not the norm. I think in 2015 we've reverted to the norm.

I would tell you I think the hog price in the US today is half of what it is in China. That sort of mass is conducive to the trade. And don't be surprised to see our exports more than double to that particular destination in 2015.

So, I think the solution really for more supply obviously is to increase the sales channels, in particular those export channels. Certainly we have got a little bit of headwind with a stronger dollar, but the reality is US agriculture is low-cost producer.

And not withstanding any currency headwind that we have, we think the export channel will continue to be robust. You go back to 2000 and you look at the trend -- long-term trend there and we see really nothing that suggests that that long-term trend, which is on an inexorable sort of march upward, is going to end.

Great, and then just a clarification on what percentage of your exports or of the total business is export and what percentage goes to China versus a similar more FX challenged area?

Sure. Think of it this way, Carla, just in broad terms -- about 25% of our production is exported. We are really no different from the industry in that regard. I think we've got a little bit higher concentration than the rest of the industry. but if you are talking rule of fun I would talk about 25% of the production, fresh meat production is exported.

Now where does that go? If you think about it, it is really three or four big markets. It is kind of the 80/20 rule or, maybe more accurately, it is the 70/30 rule. You've got Mexico, you've got Japan, you've got China, in certain years you've got Russia. And beyond that there is a long list really of other countries that we are developing regular repeatable business with.

And we are putting boots on the ground in a number of these countries in which we are establishing some sales force there to build that business so that we are not reliant on three or four markets even though three or four is a decent enough dispersion. So that is where we see the exports.

Okay, great. Thanks a lot for all the answers.

(Operator Instructions). Hale Holden, Barclays.

Thanks for taking my call, I had a couple. In the 10-K you kind of open the door to dividends in 2016 back to WH Group. I was wondering if maybe you could help size that or talk about why it wouldn't occur this year given your liquidity state.

Sure, Hale. I think really you may not like this answer, but that is really a question for the WH Group and the management team at the Hong Kong level. I think you understand we hold these calls for the benefit of our ring fenced credit here in the US.

But I would tell you that the WH Group, I think even in the IPO documents, talked about the possibility of dividends and I think that remains a real possibility for 2016. Obviously on the strength of 2015 earnings that that will be funded. So I would respectfully tell you that I think that is a WH Group question, but I would also suggest to you that there is nothing that I have seen that suggests that we could not pay dividends, I think we could.

Great. And then since you have Gregg and Scott on the phone, maybe we could get an update on how they are viewing One Smithfield. And it sort of implied, your opening comments there, the potential for plant reductions. So I was wondering what kind of efficiencies you guys were hoping to get out of it.

Yes let me -- before Gregg or Scott offers any color, let me be real clear on that. We are not intending to shutter any plans, that is not part of the design of the One Smithfield. Let me try and explain why One Smithfield is powerful and why I think it can be a catalyst for future growth.

The reality is if you look at the capacities, the utilization capacities of our plants, we are fairly satisfied with the utilization capacities of our plants. In fact, we've got a number of capital projects this year to expand the capacity in our plants. So it is not about plant rationalization, it is about manufacturing optimization. And let me give you a simple example or paint a picture for you that might help you understand that.

We have got, as I said, 40 plants in the US. We manufacture bacon, for example, at several plants across the US. We're manufacturing bacon in a plant on the East Coast and we are doing it say in Milwaukee, Wisconsin. Under the prior management structure we would -- those plants would have been under different management trees.

Under our new structure all those plants are on one span of one management control. So we can make better decisions in terms of where to manufacture that bacon and position that bacon logistically in a place that is going to reap the most benefits for the Company.

So it really becomes a manufacturing optimization play, a logistics cost reduction play. And I would tell you that those two things are very meaningful, they are not insignificant dollars in terms of what we think can come out of that process.

Imagine making bacon on the East Coast, making it in the Midwest, putting it on a truck, shipping the Midwest bacon to the East Coast and vice versa and the trucks cross each other in the night. We are going to fix that and we are going to, as I use the word optimize the platform in a way that is going to really deliver some margin expansion to our business. With that, Gregg or Scott, I don't know if you have got any comments.

Yes, from the fresh meat perspective we have embarked on the consolidation between Smithfield Farmland brands 14 months ago. So we have kind of crossed a lot of that water at this point. So our focus going forward obviously is to be the support to the packaged meats group.

We need to be the supplier as packaged meats grows their business and, as you probably know, there are certain cuts that are processor-based and then there are certain cuts that are retail-based.

So retail we have got a lot programs in the works that accentuate and support the brand of Smithfield. And then again, make sure that we have the raw material needs for the Packaged Meats group as they continue to grow their business in Smithfield brand and all of their brands.

And I would tell you, Hale, that -- to follow up on Scott's point, we have aligned all of the management incentives to be basically on the same P&L across the enterprise to drive the types of behavior that we want to see in the organization, which is ultimately to optimize and maximize the P&L.

So Scott's group, the Fresh Meat group, understands that they are to be a supplier to our Packaged Meets business. And so, we have aligned those incentives to make discussions around transfer price and things of that nature much easier.

Great, all sounds very good. And then the last question I had was some press articles around the port shutdown and specifically around hogs getting kind of stranded in warehouses, I was wondering if there was going to be a first-quarter impact from that?

Yes, I think what you read about was the West Coast let's call it labor slow down. It wasn't exactly a strike, but certainly had similar effects in the sense a lot of the cargo was not getting out including pork shipments were not getting out.

So I think you will see some effect in the first quarter in terms of we obviously have lower prices to deal with this year. And in terms of 2015 for the full year though, again, we are pretty pleased with the momentum that we've carried into 2015 from 2014.

You will see some shifting in the P&L. Obviously hog production profits last year were a blowout. I don't think you can expect to see that repeat itself particularly not with pig prices where they are today.

At the same time I think the other segments of our business are picking up slack, picking up that slack and I think our Packaged Meats, which we'll continue to beat that drum, it's Larry Pope's and you can't walk in this building without Larry Pope chewing your ear off about Packaged Meats and the consumer packaged goods Company. We're going to continue to beat that drum.

That business is off to a great start in 2015. Our fresh meat, we expect improved results year over year there. So I think we will see a shifting of the P&L in 2015, but we'll remain sort of optimistic irrespective of any hiccup we may have first quarter wise.

Great, thank you very much for the time.

(Operator Instructions).

Thank you, operator, if you could please provide that replay information and I think we can end the call.

Thank you. And ladies and gentlemen, this conference will be made available for replay after 10:00 today and running through Tuesday, April 28 at midnight. You can access the executive playback service at any time by dialing 1-800-475-6701 and entering the access code 356361. International parties may dial 1-320-365-3844.

(Operator Instructions). That does conclude our conference for today. Thanks for your participation and for using AT&T's executive teleconference service. You may now disconnect.