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Edited Transcript of 1ESP_SFD_UN earnings conference call or presentation 29-Mar-17 12:30pm GMT

Thomson Reuters StreetEvents

Q4 2016 Smithfield Foods Inc Earnings Call

Smithfield Mar 29, 2017 (Thomson StreetEvents) -- Edited Transcript of Smithfield Foods Inc earnings conference call or presentation Wednesday, March 29, 2017 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Glenn T. Nunziata

Smithfield Foods, Inc. - CFO and EVP

* Keira L. Lombardo

Smithfield Foods, Inc. - SVP of Corporate Affairs

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by and welcome to the Smithfield Foods 2016 Fourth Quarter and Year-End Results Conference Call. (Operator Instructions) As a reminder, today's conference is being recorded.

And I would now like to turn the conference over to your host, Ms. Keira Lombardo. Please go ahead.

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Keira L. Lombardo, Smithfield Foods, Inc. - SVP of Corporate Affairs [2]

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Thank you, and good morning for joining -- and thank you for joining us today for Smithfield Foods conference call for the fourth quarter and full year 2016. This is Keira Lombardo, Senior Vice President of Corporate Affairs. Joining me on our call today is Glenn Nunziata, Executive Vice President and Chief Financial Officer.

Certain statements made on this call may constitute forward-looking statements within the meaning of federal securities laws. The forward-looking statements include statements concerning our outlook for the future as well as other statements of beliefs, future plans and strategies or anticipated events and similar expressions concerning matters that are not historical facts. Our forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in or implied by such statements. Listeners are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this call. We undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. Comparisons of results for current and any periods prior are not intended to express any future trends or indications of future performance, unless expressed as such and should only be viewed as historical data.

I'll now call -- turn the call over to Glenn.

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Glenn T. Nunziata, Smithfield Foods, Inc. - CFO and EVP [3]

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Thanks, Keira. This is Glenn Nunziata, Chief Financial Officer for Smithfield Foods. Good morning to all of you.

Some of you may have noticed that the Investor Relations section of our website now requires registration to access our financial reports and other secured information that we'll put out there, including dial-in details and webcast of this call. This is a new requirement since we are no longer filing with the SEC. Our financial statements, along with certain footnotes that will be in a style that's very consistent with our previous SEC filings, will be available in this new password-protected section of our website going forward.

We recognize that Smithfield -- we are a new issuer to many of you on the call today and that really is because of our recent transaction to the investment-grade space. We want you to have access to information as an investor in Smithfield and are pleased to provide you with additional information regarding our business and results.

As we spoke to many of you and to our investors in January during the telephonic roadshow, we received strong interest in Smithfield holding quarterly earnings calls on an ongoing basis. We very much appreciate your overwhelming support and are pleased to be speaking with you on today's call.

Also as a reminder, our results are reported on a U.S. GAAP basis. And if you're looking at the WH Group financials, those are reported on an IFRS basis, and there will be some differences.

So let me now talk about 2016. 2016 was a strong year for Smithfield Foods, one in which we set new records with respect to our financial performance. Net income increased 28% to a record $578.7 million. Our operating profit was up 23% to $976.7 million. And EBITDA increased 19% to $1.2 billion. Total sales for the year were $14.3 billion, which are relatively unchanged from 2015.

Additionally, we took very important steps to strengthen our financial position, which has resulted in Smithfield reaching an investment-grade status.

During Q1 of 2017, we refinanced essentially our entire capital structure, and I'm going to cover this with you in just a moment.

So as I mentioned, 2016 was a great year, and we did set some remarkable records. We saw strong performance across our business, and I'm going to provide some additional color now on our divisions.

In our Fresh Pork segment, we achieved record-level profits. Fresh Pork sales decreased 2% to $5 billion, but operating profit grew 400 -- grew to $471.4 million or 166%. Fresh Pork operating margin for the year improved to 9.5%. We maintained our market leadership position in the industry by processing almost 31 million hogs. It was an increase of 1% in volume. The bottom line, Fresh Pork remains a spread business. We took advantage of the market dynamics during 2016, those were low hog prices, but sustained meat prices to report sizable margins.

Additionally, we continue to make improvements to our Fresh Pork operations that allow us to remain competitive and increase our competitiveness in the industry. These improvements also contributed to our operating profits.

All our Fresh Pork sales channels, retail, foodservice and export, had a great year. Our branded Fresh Pork volume was up by more than 88 million pounds, a more than 20% increase.

Smithfield marinated Fresh Pork continue to drive share leadership with both volume and dollar share, up 32%. Smithfield Prime grew an impressive 42%, exceeding 70 million pounds in 2016.

In our packaged meat segment, our team executed well throughout the year, and we had strong performance across all our brands. We've nearly doubled our performance from just 3 or 4 years ago with essentially the same assets. Sales increased to $7.1 billion, and operating profit in packaged meats was up 2% to $685.5 million. But when we adjust to the $39 million noncash impairment charge we recorded, our adjusted operating profit was approximately $725 million. Our operating margin for packaged meats for the year, again adjusted for that same charge, increased to 10.2%.

Our brands are on fire, to say the least. Smithfield retail branded profit tripled, driven primarily by Smithfield bacon and Smithfield Anytime Favorites. Eckrich Smoked Sausage volume achieved nearly 15% market share, thanks to strong performance from Eckrich Smoked Sausage links.

Nathan's hot dogs continue to gain momentum in both sales dollars and volume and achieved nearly 20% volume share as a quality beef hot dog category.

I'm especially pleased to announce that in 2016, our innovation efforts brought more new products to market than any of our key competitors. We've introduced a wealth of new products as we further our transformation into a true consumer packaged goods company.

In the International segment, sales increased by 4% to $1.5 billion. Operating profits grew by 65% to $108.8 million, and operating margins increased to 7.3%. We attained double-digit growth in key branded categories, including cooked ham, canned meat and Berlinki and Morliny Hot Dogs to help drive our profits.

Our production sales decreased to $2.7 billion, and operating loss for the full year was $140.2 million. However, despite some headwinds, our hog production division had some notable accomplishments. We've achieved cost savings and improved productivity, while also attaining best-in-class fee conversions and growth rates. And of course, the Farmer John acquisition will also strengthen our vertical integration story by matching our hog supply with our meat plants.

Turning now to our balance sheet. I'll first recap actions we took toward the end of 2016, and then I'll cover those taken at the start of this current year.

In September, we issued a notice to our bondholders to call 250 million principal of our bonds maturing August 2018. The redemption of the bonds in October 2016, together with the premium and any accrued but unpaid interest, was funded entirely with cash. As a result of this redemption, we recognized losses on debt extinguishment of $4.6 million in the fourth quarter.

In December, we elected to prepay the outstanding amount of $50 million on our Rabobank term loan, which included a 1% prepayment premium using cash on hand. The loan was subsequently terminated.

Turning to our financial position and liquidity. I'm going to quickly run through some of our key data points. At year-end, we had cash and cash equivalents of $570.2 million. Total debt was $2 billion. Our debt-to-EBITDA ratio was 1.65x. Our debt-to-capital ratio was 29%. And we covered interest 9.6x. We have over $1.2 billion of global liquidity, and we've maintained that really strong liquidity position even after our significant 2016 cash actions. And those included a $280 million reduction in debt, $225 million in voluntary pension contributions and a $400 million dividend to our parent company.

I'd like to note that our leverage is often at its lowest point during December since December is a period in our business that sees the highest level of working capital inflows due to the peak sales volumes around the Thanksgiving and Christmas holidays. The seasonality of our business can result in significant working capital fluctuations, and I've spent time on previous quarterly calls talking to many of our investors about this topic. We are never surprised by $150 million, $200 million, $250 million swings in working capital depending on what time of year it is. That being said, we continue to actively manage leverage at very comfortable levels. Those levels are in line with our investment-grade profile, and they also provide us with financial flexibility to execute on our business strategy.

Finally, CapEx was approximately $370 million in 2016. We expect our capital budget for normal course maintenance and payback projects for 2017 to be in line with that number. That's compared to an expected full year depreciation expense of approximately $240 million to $245 million. But we may also incur incremental capital, as we begin to execute on opportunities within our earnings improvement and growth plan, and I'm going to cover that with you in just a moment.

Now for 2017. As many of our bank lenders on this call know, in February, we closed a new 5-year unsecured bank credit facility with 25 U.S. and global banks for a total of $1.5 billion, $1 billion of which is an undrawn revolving credit facility and $500 million is a 5-year term loan. This was an important transaction for us at Smithfield. Our core bank lines are now unsecured and on an investment-grade format.

We also had a very successful issuance of $1.4 billion of senior unsecured bonds on February 1. The new bonds have maturities of 3, 5 and 10 years. We used the proceeds from the $500 million term loan, together with the proceeds of the new bonds, to refinance $1.8 billion of our existing debt, which had a high yield -- an average yield of about 6.6%. The newly issued debt has a weighted average interest rate of 3.55% and that difference resulted in an annual cash interest expense savings of approximately $55 million.

Overall, we've made tremendous strides in securing our financial position. And as a result of our efforts, our balance sheet strength enables us to grow our business and drive profits into the future.

Before I turn the call over to questions, I'd like to speak briefly about the strategy I spoke about. Future growth at Smithfield will be driven by our earnings improvement and growth plan, or the plan for short. This represents a wide-ranging vision for the future of Smithfield, both domestically and internationally. It covers all our geographies. This compressive plan recognizes that growth can be achieved through bottom line earnings growth and through acquisition. It captures numerous, separate and distinct growth opportunities. There are over 40 individual opportunities that we're going to pursue.

In many separate initiatives, including the plan, fit into 5 core pillars: one, continuous improvement. As a company, we must see continuous improvement. This means being best-in-class global food company. To do this, we will improve our cost structure across our entire company, that's in Fresh Pork and packaged meats, on our hogs farms and in our international operations in both Europe and Mexico. Our commitment to operational excellence is all about improving our customer service and product quality so that we become the clear supplier of choice for all our customers worldwide.

Two, organic growth. We will find new ways to leverage and grow our highly attractive assets. We will expand our product offerings, advance our e-commerce efforts and much, much more. The assets we currently have provide enormous opportunities to grow organically through the portfolio, trade channel and capacity expansion.

Three, new plant capacity. We will ensure that we have the appropriate capacity to support this growth. This includes both new equipment and lines within existing facilities as well as new construction. We will have best-in-class operations going forward.

Four, strategy pivots. We will continuously adapt our business model to maximize profit opportunities. This will involve some strategic pivots to optimize our vertically integrated model, manufacturing platform and distribution system. Strategy pivots include new initiatives that will change the way we do our business today.

And 5, M&A. We can enhance our growth through selective and disciplined mergers or acquisitions. We will identify and pursue businesses that align with our vision for the future and our culture of responsibility, operational excellence and innovation. For example, in January, we completed the acquisition of Farmer John from Hormel Foods Corporation. With this acquisition, we created a more efficient supply chain coast-to-coast and expanded our operations and product portfolio as well as our customer and consumer base.

We believe our new direction brings tremendous promise and opportunities. And with our team's execution of initiatives in these 5 core pillars, we expect Smithfield to grow its position as a global food company, known for our strong commitment to operating excellence, innovation, powerful brands and our marketing culture.

To summarize, we are extremely pleased with our progress during 2016. And we believe Smithfield is ideally positioned to achieve strong results in 2017 and meaningful growth well into the future.

And with that, I'll turn the call over to the operator for questions.

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Keira L. Lombardo, Smithfield Foods, Inc. - SVP of Corporate Affairs [4]

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Operator, please open the line for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

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Keira L. Lombardo, Smithfield Foods, Inc. - SVP of Corporate Affairs [2]

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Operator, hearing that there are no questions, I think we can end the call here. Thank you very much, everyone, for participating.

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Operator [3]

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And ladies and gentlemen, today's conference will be available for replay after 10:30 a.m. today through April 12. You may access the AT&T teleconference replay system at any time by dialing 1 (800) 475-6701, entering the access code 420883. International participants may dial (320) 365-3844. That does conclude your conference for today. Thank you for your participation and for using the AT&T Executive TeleConference Service. You may now disconnect.