Earnings Call Transcript - SFD Q2 2025

Operator, Operator

Good day, everyone, and welcome to the Smithfield Foods' Second Quarter 2025 Results Conference Call. Please also note, today's event is being recorded. At this time, I'd like to turn the floor over to Julie MacMedan, Vice President of Investor Relations. Ma'am, please go ahead.

Julie MacMedan, Vice President of Investor Relations

Thank you, operator, and good morning, everyone. Welcome to Smithfield's Second Quarter 2025 Earnings Call. Earlier this morning, we announced our results. A copy of the release, as well as today's presentation, are available on our IR website, investors.smithfieldfoods.com. Today's presentation contains projections and other forward-looking statements that are being provided pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include all comments reflecting our expectations, assumptions, or beliefs about future events or performance that do not relate solely to historical periods. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to, the factors identified in the release, in our annual report on Form 10-K, our quarterly reports on Form 10-Q, and our other filings with the Securities and Exchange Commission. The company undertakes no obligation to update or revise publicly any forward-looking statements, whether because of new information, future events or other factors. Please refer to our legal disclaimer on Slide 2 of the presentation for more information. Today's presentation will also include certain non-GAAP measures, including, but not limited to, adjusted operating profit and margin, adjusted net income, adjusted earnings per share, and adjusted EBITDA. For a reconciliation of these and other non-GAAP measures to the corresponding GAAP measures, please refer to our earnings press release and our slide presentation on our website. With me this morning are Shane Smith, President and CEO; Mark Hall, CFO; Steve France, President of Packaged Meats; and Donovan Owens, President of Fresh Pork. I will now turn the discussion over to Shane.

C. Shane Smith, President and CEO

Thank you, Julie. Good morning, everyone. I am pleased to report that we delivered record second quarter adjusted operating profit of $298 million, that's up 20% from adjusted operating profit of $248 million in the second quarter of 2024. In addition, our adjusted operating profit margin of 7.9% improved from 7.3% in the second quarter of 2024. Our record second quarter results demonstrate the resilience of our business model as we successfully navigated a dynamic consumer spending and geopolitical environment. We grew sales and volume in our Packaged Meats segment, demonstrating the power of our iconic brand portfolio, which continues to deliver quality and value across all price points. Our Fresh Pork segment also increased sales and volume as it adeptly managed short-term disruptions in certain export markets, and our Hog Production segment continued to increase profitability, with a solid first half performance. Given the more favorable full year outlook for Hog Production, we have raised our full year outlook. Looking at profit by segment. Our Packaged Meats segment delivered adjusted operating profit of $296 million, with an adjusted operating profit margin of 14.2%, as we successfully navigated higher raw material input costs and a cautious consumer spending environment with our well-diversified portfolio of products and price points. We also continue to achieve operating efficiencies and cost savings. Our Fresh Pork segment reported adjusted operating profit of $30 million with an adjusted operating profit margin of 1.4%. This was up from $17 million and 0.9% in the second quarter of 2024. Our team demonstrated agility in executing our strategy to maximize product values through our multiple channels. We've maximized profitability through our ability to flex production over the course of the quarter. We navigated the China tariff disruption, minimizing the impact by selling into alternative countries and channels, and subsequently resuming shipments to China. The team also continued executing our operational strategies, resulting in improved cost and efficiency. Our Hog Production segment delivered adjusted operating profit of $22 million, versus a loss of $10 million in the second quarter of 2024. The increase was driven by improved market conditions and a more efficient cost structure on our retained farms. We achieved strong year-over-year profit improvement during the quarter, despite recognizing a loss of approximately $15 million related to mark-to-market derivative instruments. Our Hog Production segment is performing well this year. Given solid execution on our internal efficiency initiatives, combined with more favorable market conditions, we have raised our full year Hog Production segment operating profit outlook by $50 million. In summary, we delivered record second quarter adjusted operating profit through disciplined execution on our strategies and our relentless focus on continuous operating improvement. Our performance underscores the strength of our experienced executive team as we navigated a dynamic consumer spending and tariff environment. Our balance sheet and financial position are solid. We have ample financial flexibility to support our growth strategies and deliver value for our shareholders over the long term. Now turning to our outlook for fiscal 2025. I'm pleased to report we've raised our outlook for adjusted operating profit, driven primarily by our increased outlook for our Hog Production segment. Mark will share more details in a few minutes. Now I'll turn to our key growth strategies. Our five strategic growth priorities are as follows: increased profits in our Packaged Meats segment through enhanced product mix, volume growth and innovation; grow profits in our Fresh Pork segment by maximizing product value across channels; achieve a best-in-class cost structure in our Hog Production segment; optimize operations and deliver operating efficiencies in manufacturing, supply chain, distribution, procurement and SG&A; and finally, evaluate synergistic M&A opportunities across North America.

Mark L. Hall, CFO

Thanks, Shane, and good morning to everyone joining the call. In the second quarter, we delivered $298 million in adjusted operating profit, an increase of 20.1% versus the prior year, marking a record second quarter and reflecting the resilience of our business model. We achieved higher adjusted operating profit dollars across each of our three segments. We ended the second quarter with a strong balance sheet, and we have the financial flexibility to invest in growth and return value to our shareholders. Turning to the details of our second quarter results, starting with the consolidated results and then a review of our performance by segment. Consolidated sales in the second quarter were $3.8 billion, representing an 11%, or $374 million increase compared to the prior year. This was driven by sales growth across all segments. We delivered record second quarter adjusted operating profit of $298 million, and an adjusted operating profit margin of 7.9%, compared to an adjusted operating profit of $248 million, or 7.3% in the second quarter of 2024. Second quarter 2025 adjusted net income from continuing operations was also a record at $217 million, compared to $192 million in the second quarter of 2024. Adjusted EPS was $0.55 per share, compared to $0.51 per share during the second quarter of 2024.

C. Shane Smith, President and CEO

First, in Packaged Meats, which is our largest and most profitable segment, representing 55% of our consolidated sales, with 98% of our packaged meat SKUs sold here in the U.S. While consumer budgets remain tight, our Packaged Meats segment is benefiting from several tailwinds. We are capitalizing on increased demand for protein. In addition, our products span the perimeter of the grocery store where consumers have shifted their spending patterns. Today's consumers are looking for value and convenience. We are meeting these demands with our iconic and diversified brand portfolio that covers a wide range of price points and includes convenient packaging and portion sizes suited to people's busy lifestyles. We are focused on meeting consumers' needs profitably. Our three-pronged strategy to grow Packaged Meats segment profit encompasses product mix improvement, volume growth and innovation.

Steven J. France, President of Packaged Meats

So I appreciate the question. And obviously, we spent a lot of time looking at all the different topics that I guess are involved in the question that you just asked. But as far as a retail perspective, so at a high level from a for food and beverage spending, it's we still see it's pretty soft, and it's really two ongoing economic challenges. So we see that consumers are hesitant. Weather has certainly been unpredictable, and inflation is still putting pressure on consumers' wallets. So while confidence has picked up a bit in June after a slow start to the year, it's still not where it was last year. And consumer demand really remains resilient but cautious, I would say, in 2025, shaped by inflation fatigue, shifting value perceptions and evolving household behavior. So with that said, we're very pleased with where we ended up in Q2. So if you look at some of the numbers that were just reported from a sales perspective, we're up almost 7% on sales, and volume was up 4.5%. And specifically to our brand. So if you look at Circana data for Q2, our volume share was actually up 60 basis points, which outperformed our key competitors. And I would say that these are very impressive results when you consider that we have not increased promoted volume.

C. Shane Smith, President and CEO

Thanks, Ben. For your first question, maybe I'll kick it over to Steve to talk about what we've seen from a consumer standpoint. And then, Ben, to your second question on Hog Production. We do have visibility into the back half of the year. And while we did have a mark-to-market component in the second quarter, we are comfortable raising our guidance. We look at the pricing that we see out in the futures markets and of course, we temper that with things. You look at the USDA report, they're expecting about a 0.9%, or 0.9% increase in overall full year pork production. But we also look at the last four weeks slaughter levels or harvest levels across the industry. Compared to the same time last year, and we're actually down 3% on a per head basis, and we know that weights are lighter. And so we believe that's one thing that's going to help support pork prices as we go into the back half of this year and into the first quarter of next year.

Mark L. Hall, CFO

So during the second quarter, our average market hog selling price was flat year-over-year, and that is inclusive of the impacts of hedging. So you compare that to the CME Lean Hog Index, which is up about 4% over the same time period. So as you alluded to, we have a number of instruments that we utilize to mitigate risk and not all of those qualified for hedge accounting. So as a result, our second quarter results were impacted by $15 million with the mark-to-market adjustment that really related to positions that will materialize in the second half of the year.

C. Shane Smith, President and CEO

So again, we feel good with our guidance for the year. And where we see this back half going, especially as we continue to change our product mix from traditional lower-margin products into many of the higher-margin categories. So really confident looking forward and where we think the Packaged Meats business will continue to go.

Mark L. Hall, CFO

I think that's a fair way to look at it, Megan, right now with where the futures curve is right now. The range is still the $100 million that we quoted at the beginning of the year, but we did raise that by $50 million, but I'd say it leans towards the higher end.

C. Shane Smith, President and CEO

As we continue to navigate a dynamic consumer spending and tariff environment, we believe that we are better positioned than most of the companies due to our product portfolio. We know consumers are looking for value. And that plays into where we believe we are better positioned to meet consumers wherever they are along the value chain. Okay. Thanks to everyone who joined our call today. We are pleased with our first half performance and believe we're well positioned to deliver long-term growth and increase value for our shareholders even in a challenging environment. We look forward to updating you on our progress following our third quarter results. Thank you.

Operator, Operator

Our next question comes from Heather Jones from Heather Jones Research.