Smithfield Foods Inc (SFD) 2015 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to Smithfield Foods' 2015 first-quarter results. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. (Operator Instructions) As a reminder, this conference is being recorded.

I'd now like to turn the call 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 first quarter of 2015. On our call today are Ken Sullivan, Executive Vice President and Chief Financial Officer; Scott Saunders, President, Fresh Pork Division; and Gregg Schmidt, President of 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'll now turn the call over to Ken.

Thank you, Keira. Good morning, everybody, and thank you for dialing in to hear our interim report for the first quarter. This is our second call in just two weeks, so we'll keep this call fairly crisp.

I'm pleased that Scott and Gregg are again joining me on this call this morning. It's been 60 days since our new One Smithfield Organization structure took effect. As Keira said, Scott is the President of our Fresh Meat Division, and Gregg is the President of our Hog Production Division. These gentlemen lead two of our four operating divisions in the One Smithfield Organization structure.

To remind you, we recently eliminated our independent operating companies and combined all our operations into four cohesive operating divisions. The IOC model fostered silo decision-making, and as a result, we were suboptimizing in a number of areas.

The new structure will be a catalyst for profit improvement, some of which we are already realizing in Q1. We expect the new structure to yield dividends in four key areas -- transportation and logistics; manufacturing; the front-end sales process; and finally, in brand management. So, expect the leaders of our divisions to be more visible on these calls going forward.

In terms of prepared remarks, I will be brief. We filed our first-quarter Form 10-Q early this morning. It contains all the details you will need. I'll quickly summarize our Q1 2015 results, then we can take questions. All comparisons are to the comparable period last year.

Here are the numbers. Sales totaled $3.616 billion compared to last year's $3.422 billion. The increase in sales is largely attributable to a particularly strong quarter for our Packaged Meats Division. More on that in a moment.

Sales increased nearly $200 million, despite FX translation headwinds of approximately $50 million related to the stronger dollar. Operating profits totaled $188.2 million compared to last year's record quarter of $196.4 million, a decline of approximately $8 million. Considering the headwinds created by sharply lower pig prices, meat prices, and FX translations, this operating result is not unexpected and is, in some respects, remarkable in that we were able to nearly keep pace with last year's record quarter.

Pretax profits, for example, totaled $140.7 million versus $156 million last year. But it's important to note that this year's figures include a $12.8 million charge for early debt extinguishment related to the bond tender we executed in February. Adjusting for that charge, pretax profits would've totaled $153.5 million versus $156.7 million last year.

Further, net income totaled $97 million compared to $105.3 million last year. Again, adjusting for the $12.8 million charge, this year's result would have effectively equaled last year's record quarter. All things considered, a good quarter. Let's see how we got there.

Essentially, we saw a shifting of the P&L between segments, with more profits coming from our Packaged Meats business and less from each of the other segments. This shifting theme is one I expect to see play out over the remainder of 2015. For the full-year, I expect lower earnings from our International Hog Production Divisions, but better performance year-over-year in our Packaged Meats and Fresh Divisions.

In terms of Q1, our Packaged Meats segment had an absolutely outstanding quarter. Packaged Meats profits totaled $172.5 million, up nearly -- up near than -- more than 40% from the prior-year total of $121.3 million. Our operating profit margin was a robust 10.1%. Volumes were particularly strong, up 12% year-over-year.

To be fair, the timing of the Easter holiday was a major factor in that increase. You might say Easter came early this year. In fact, Easter did come earlier in 2015 than it did in 2014. As a consequence, our Easter ham business had more of a positive impact in this year's first quarter than it did last year.

Still, even adjusting for the early Easter volume effect, we are very pleased with the volume increases we are seeing from our Packaged Meats. We think it validates the investments we've been making in our brands, and underscores the underlying strength of our management team in this division. They are focused on product innovation and delivering from our customers, and it's showing up in the numbers.

Looking forward, we expect our Packaged Meats Division to have a strong 2015, continuing the long-term trend of margin improvement and brand-building. While every quarter may not be as strong, the trend line is moving inexorably higher. As we've said many times, we think we are on our own 20-yard line with 80 yards of green grass in front of us. With this first quarter, we are moving the ball down the field a little, but we still have a lot of green grass ahead. And we remain very confident we are building a formidable branded consumer goods business that will not take a second seat to anybody in the industry.

Fresh Pork profits totaled $33.2 million compared to $58.9 million last year. Fresh Pork profits in Q1 were on pace with last year's full-year run rate. However, they lagged last year's strong Q1 result.

Obviously, the Fresh Meat Division had its hands full in the first quarter. With the West Coast port slowdown affecting export volumes and pig production up, we had a lot more meat to deal with this year. Fortunately, the port issue has slowly cured itself, and notwithstanding the quarter-over-quarter decline in Fresh Meat, we are still expecting an improvement in our full-year Fresh Meat results for 2015.

We expect our export programs to pick up considerably over the balance of the year, as we finalize details of an exciting export program with our sister company in China. Hog production turned in a small loss of $6.4 million or just over $1.00 a head compared to a small profit last year of $9.5 million.

While you never like to see losses, Q1 and Q4 are seasonally the weakest quarters in hog production, and our result was, I think, considerably better than industry averages because of our hedging contributions, which were significant in the quarter. Going forward, the industry should see profits in Q2 and Q3. However, Q4 still needs a bounce in prices before the same can be said. With supplies a bit uncertain due to some emerging health issues, like PRRS, we'll see how Q4 develops.

International profits totaled $15.9 million compared to $36.9 million the previous year. Quite simply, the international hog production was a major contributor to earnings last year, and lower pig prices in the EU and Mexico have slowed earnings in that segment. Earnings from our meat operations in Poland were up year-over-year, but lower results from our joint venture operations hurt earnings. Our 37% stake in Campofrio Food Group contributed approximately $6 million to the year-over-year decline. CFG suffered a fire at its largest plant last year, and has been adjusting ever since.

In terms of other P&L items, financing costs, interest expense continues to tick lower. Interest expense was $34.7 million for the quarter compared to $40.8 million last year. This reduction reflects our ongoing debt reduction efforts as well as strategies that our finance team has employed in an effort to constantly lower costs.

I compliment our Treasury team, led by Tim Dykstra, for all the proactive actions they've taken to improve our balance sheet and P&L. These actions include the tender offer completed in February. We expect to realize savings of $12 million annually as a result of that strategy, which effectively replaced higher-cost bonds with lower-cost borrowings on our short-term credit facilities. In the process, we realized a rate arbitrage of more than 5%.

In addition, our team recently renewed our inventory revolver, giving us more than $1 billion capacity on that facility for the next five years at very favorable interest rates, which today, are just over 2%. On a full-year basis, I expect our interest costs to run approximately $140 million, exclusive of the $12.8 million early debt extinguishment charge in Q1.

EBITDA in Q1 totaled $233.4 million, and this includes the $12.8 million early debt extinguishment charge. On a trailing 12-month basis, EBITDA remains a robust $1.142 billion, again, inclusive of the $12.8 million charge.

In terms of the balance sheet, I will repeat what I said just a few weeks ago on this same call -- it's healthy. Our leverage ratios are hovering around two times. Our debt-to-cap is around 35%. Our net debt to cap is around 34%, and we are covering interest by more than 7.5 times. During the quarter, we repaid $288 million of debt to reduce our outstanding growth debt balance to $2,438,000,000. That's down from December's 2014's gross debt balance of $2,726,000,000.

We used cash on-hand and, of course, earnings to repay both bank debt and public bonds. I will repeat what I said a few weeks ago. We have less debt today than we did at the date of the WH/Shuanghui merger just 18 months ago. We've repaid $1 billion in debt since that merger.

In terms of liquidity, liquidity is a nonissue, with more than $1.3 billion of global liquidity, including invested cash. Again, no meaningful debt maturities anywhere on the horizon, and we expect to be in a very strong liquidity position for the foreseeable future.

A few other odds and ends. CapEx in Q1 totaled $67.7 million, doubling last year's Q1 investment of $30.8 million. As I've said in the past, we have an investment plan for our plants that contain a number of capacity expansion projects, as well as payback efficiency projects in the pipeline. I expect capital spending will accelerate as we move throughout the year. Our capital budget for 2015 is $380 million.

Depreciation and amortization for Q1 was $58 million, a small increase over last year's $56.7 million. I expect full-year depreciation and amortization for 2015 to be in the $230 million to $235 million range. In terms of covenants, again, there are no issues to report here. There simply are no covenant issues. And with that, I think that provides a summation of the first quarter.

I go back to my earlier comment, which was really the bottom line number, the net income number. And when you adjust for the early debt extinguishment charge, effectively, our results equaled last year's first-quarter record result, which, considering all the industry fundamentals and the headwinds that we faced in Q1, was really a satisfactory result for us.

With that, Keira, I think we can take some questions on the first quarter.

Thanks, Ken. Operator, please open the line for questions.

(Operator Instructions) Bryan Hunt, Wells Fargo.

Thank you for your time this morning. I have a few questions. First of all, when you look at Smith's One Smithfield and the progress you had, and you've called it out in Q1, can you tell us or quantify the benefits in Q1, and maybe opportunity you see to improve cost and/or sales momentum this year from the strategy?

Yes. I think it's -- I think the short answer is, it's significant. I'm not going to quantify it for Q1. I don't have a sharp enough pencil, frankly, to put an exact figure on it on Q1. I think we are seeing the benefits. I don't think we are anywhere near seeing the full benefits.

I go back to my comment about where we expect to see these improvements. We expect to see it in the manufacturing front, and in the sales and logistics -- or sorry, in the distribution and logistics costs. Those will be the two biggest drivers with, not far behind that, the sales process.

I think we are seeing it to some degree on the sales front in Q1. But I would tell you the bigger dollars are yet to be realized, and they are going to come from making smarter and better manufacturing decisions. They are going to come from reorganizing our distribution system, so that we are optimizing what we're doing in that area, including putting fresh and packaged products on the same truck, having less-than-full truckloads around, and essentially reorganizing the entire logistics system of what we're doing.

I would point out to you that I mentioned -- I think I mentioned to you on the last call that while we've made the organization changes we need to make, we are also, in the background, making some behind-the-scenes changes to our information systems. There was a point in time where Smithfield had nearly 15 ERP systems operating across the world, and we have significantly reduced that number.

We've got a project now, an SAP project, where we are essentially putting all the US pork operations on one ERP system in the United States. And I would tell you that that project, which is going to run really for the next 12 to 18 months, will be running in the background. And that will be another catalyst for profit improvement as we are able to get better information for decision-making.

So, what I would tell you is, I think the benefits from the One Smithfield are real; they are tangible. They will show up in our margin results, in particular in the fresh meat area and the packaged meat area. And beyond that, I'm not yet prepared to put a quantification on it, other than to say I think it will be measurable and meaningful to the margin structure. I won't be surprised if our margin structure moves up 100 to 200 basis points as a consequence.

Great. Thanks for that color. Next, I mean, looking at exports, it's kind of surprising the information out of China. Sow population is down double digit and yet, exports out of the US are kind of lackluster, given the dramatic decline in meat prices, which is even greater than the currency move we've seen. So, pork is cheaper year-over-year.

What do you think is holding up accelerating exports out of the United States? And when do you really see it kicking in, if you will?

Yes. That's a great question and I think your analysis is spot-on. I think, clearly, the port slowdown in Q1 did not help. I think, overall, US exports were down or certainly were year-over-year. When I looked behind the numbers and see where those declines came from, China, in fact, was down for us year-over-year.

The good news is, the -- that port issue has been resolved, and our export program is geared up and is increasing the volumes that we are sending through that channel, including to China. And I expect that we will see a significant increase in our exports to China. And on the whole, for the year, I think our exports will be up.

I would tell you what's held it up -- it's interesting, if you look at what's happening in China, you are correct to point out that people talk about sow liquidation numbers in China. And I would tell you I've seen numbers that suggest that the sow liquidation in China is as large as the entire US industry. You know, 6 million sows. If that number is anywhere near accurate or anywhere near correct, it would suggest a significant need and demand from China.

I can tell you, over the last two or three weeks, we have seen prices move. And that differential between US prices and China prices is widening, and widening at a rapid clip. I do expect that it will continue to accelerate through the year.

So, if you looked at it two weeks ago, I think hog prices in China were double that in the US. I think the news that we've seen here, in particular, over the last 10 days or so, suggests that that price gap is going to continue to accelerate, and that's going to be favorable for not just our exports, but the entire US pork complex, it will be favorable.

People have talked about the stronger dollar and the impact on exports. I think the reality is, again, US agriculture's low cost on the world scale, and can withstand a little bit of currency headwind. Not helpful, certainly, to currency headwind, but it's not a death knell either. Because, as I said, our cost structure here is really very favorable compared to worldwide structures.

And two last questions. One, can you talk about what your hog raising cost was in 2014? Just remind me real quick. And maybe what the outlook is for this year?

Yes. Let me get the number for you, what we averaged in 2014. I would tell you the outlook for this year is that we think our raising costs or breakeven is going to be just above the mid-50 point. In other words, it's probably in the [$0.56] -- call it [$0.56 to $0.57] range. Now that's -- today, obviously, conditions do change. Grain prices change. You've got production factors that affect that.

I would tell you in terms of hog production, again, we are not going to have the type of year that we had last year, that goes back to my shifting comment and the P&L. I think we're going to see shifting in the P&L, see less profits on hog production, and more in our Packaged Meats business, more in our Fresh Meat business, I think. (multiple speakers)

And what's -- while you are talking about hog production, what's PRRS?

Yes, PRRS is a pig disease. It's a respiratory disease in pigs. And it's not a new disease by any stretch of the imagination. But I think, certainly, we've seen it become a little more active and virulent over the last couple of months here. So (multiple speakers) --

And I promise my last question --

(multiple speakers) -- and I would just complete the answer. In terms of raising costs last year, I think we are averaging in the [mid-60s] -- something below, just to call it $0.64 type thing. So we've seen a significant reduction in our costs. That's over $20 a head reduction in our cost. Of course we've got lower pig prices to deal with.

And my last question, I promise. When I look at your prepayable debt, it looks like you have a rather big term loan of roughly $200 million. And that's -- you may have gone down on -- and I haven't looked at the Q holistically yet, but you may have gone down on the Q because you burned some cash in Q1, which is normal seasonally. You know, with excess cash flow, what's kind of your target? Should we expect another tender? Should you build cash in the balance sheet? What should we expect as investors?

Well, I would point out to you that we are obviously in a seasonal business, and our cash flow generation is greatest in the first quarter. I think I've pointed out in my prepared comments that we've reduced the gross debt balance by $288 million during the quarter.

Really, if you look at the balance sheet, you can see that a lot of that did come from -- we had over $400 million of cash on-hand at year-end. And part of that debt reduction was obviously funded through that cash on-hand. But nonetheless, we've obviously had a pretty good quarter here in the first quarter.

What's our plan? We've got -- as you point out, we do have some pre-payable debt on the balance sheet that's not as much as you've suggested, because we did pay some of that in Q1. In other words, part of that debt reduction in Q1 was a reduction of an outstanding bank debt. We still have some borrowings on that particular facility that we could pay down.

But I would also tell you if you look at the terms of our bond indentures, you'll see that we've got some call options that are beginning to kick in this summer. And so I think beginning in mid-summer, we've got, as I said, some call options that are appearing. As I said in my prepared remarks, our Treasury team is pretty focused on this kind of stuff. And we will certainly be looking for every opportunity to lower costs.

Great. I really appreciate your time.

Okay. Thank you.

(Operator Instructions) Todd Harkrider, UBS.

You've had a very strong track record of hedging successfully in the past and smoothing out earnings. Can you give us some additional color regarding where you expect hog production earnings to be in the second and third quarter? Are you expecting them to be down like 10% to 20%? Or could it be down 40% to 50%, given the lack of hog supply last year? Or any additional color on the cadence would be helpful. Thanks.

Well, let me put it this way, Todd. I think you are right in terms of your assessment. Our hedging is going to help us last year. I would tell you, though, that again the nature by its hedging is a two-edged sword, and in some years, it's going to hurt you, some years, it's going to help you. In 2015, it will help us.

And what I would tell you is if you look at the industry, you'd probably see losses in Q2, is the reality. If somebody had not hedged and you are just looking at the futures market, and you are looking at what a nominal raising cost might be, you'd probably see some losses there. And I would tell you that our P&L will not show losses in Q2.

Obviously, prices change every day. But as I look at pig prices today and what the futures markets are, it's suggesting that we've got an advantage of, I would say, more than $15 a head relative to the industry in Q2. And you know it's approaching $20 of benefit in Q2.

Q3, you see a similar type of situation. Although in Q3, you've clearly -- the industry would suggest that there is going to be profits. And I would call that in the $15 to $20 a head range in Q3. And again, we are going to have a benefit there and our results will be better. I don't really want to talk specifically about our hedge positions but other than to tell you that in Q3, I expect us to be better than the industry than by perhaps $5 to $10 a head.

Q4, again, I think the industry has got a little bit of ways to go here. We need a couple of cents a pound bounce in Q4 for the pig production.

That's very helpful. I appreciate it. And then I think you gained clearance to export pork to China from your Romanian operation earlier this year. Is that facility set up to ship to China today? And what kind of incremental revenues do you think that could provide?

We did get clearance. I would not expect incremental sort of revenue or incremental revenue from that standpoint. The real benefit from that is going to be the ability, just like it is in the US, to clear product from the market in the domestic market, and what that means to domestic prices. And so I would tell you, Todd, that while we are pleased to have received that clearance, and we do think there is opportunities there, the far larger opportunity for us is going to be from the US export into China.

Okay. I appreciate it. And good luck with the summer selling season. Thanks.

Thank you.

And currently, no further questions in queue.

Great. Thanks. We'll end the call here. Please provide the replay information. Thank you.

Thank you. And ladies and gentlemen, the conference will be made available for replay after 11 o'clock today and running through Wednesday, May 13 at midnight. You can access the AT&T Executive Teleconference playback service at any time by dialing 1-800-475-6701 and entering the access code 358785. International parties may dial 1-320-365-3844 with the access code 358785. Again, those numbers 1-800-475-6701 or 1-320-365-3844 with the access code 358785.

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