Highlights From SFD's Q4 Conference Call: Record Quarter in Record Year

Smithfield Foods, Inc. (NYSE: SFD) reported Q4 EPS of $0.85, $0.02 better than the analyst estimate of $0.83. Revenue for the quarter came in at $3.12 billion versus the consensus estimate of $3.25 billion. Shares are trading up 6.30% going into the close

Highlights From SFD's Q4 Conference Call:

• (C. Larry Pope) I am extremely pleased to report another record quarter for the company as well as a record year for the company.
  
• As you can tell, we've seen from the press release we're reporting $98.4 million or $0.59 a share.
  
• And as explained in the press release, we've got some cost associated with buying back our bonds, resulting in about $0.26 a share. So on a proper basis, I would say it's $0.85 a share, which is a record for the company. For the year, we're showing $521 million or $3.12 a share.
  
• And as you know, the Fresh Pork complex has been bolstered by the strong export environment that has been existing now for some time, as well as some changes that have gone on, on the Fresh Pork side relative to supply and demand.
  
• And the USDA has recently put out some additional information in terms of their forecast own exports being up 10% to 15%. We have that same opinion. I know that you're aware that the exports in the very most recent months are up some 17% and from our standpoint our exports are flat. However, we have substantially less available on the export markets because of the reduced kill associated with the Sioux City plant, but we are seeing that kind of activity in the Asian markets.
  
• Turning to the Packaged Meat side of the business, that's again a very good story for the company. I am very pleased and Bo will go over more of the details, but I'm very pleased with our sales effort and our sales discipline on the Processed and Packaged Meat side of the business. We are continuing to deliver well above my $0.10 goal that I had for the company a few years ago. We're well above that in spite of the fact that we have had sharply higher raw material costs.
  
• I am very pleased with the success our organization has had in passing those raw material costs through. Again, that is the result of a good supply and demand balance.
  
• Now our Easter Spiral Ham business was up 12%, with our Branded business in the Smithfield brand under Spiral's up 50%. So that is a tremendously good story.
  
• Our marinated pork under our Branded program was up 18% and our Eckrich Smoked Sausage Branded business is up 25% and our Smithfield Branded Bacon business is up 26%. And so those kinds of things give us enormous confidence in the fact that we are beginning to speak more and more to our consumers.
  
• We are increasing our attention and the money that we are spending on the marketing end of this side of this business. And in fact, for the coming year, our new fiscal year, we are committing an 18% increase in our consumer marketing trade spending in order to [ph] let us (0:07:55) be close and more often to the consumer out there. We want them to understand ourbrands and appreciate those.
  
• We are seeing exactly the benefits we expected at this point. I think we saw something like $30 million in this last fiscal year. We're looking for something along in that range for the next fiscal year in addition to that. So that part of the process is just as we expected as we renovate and realign these farms.
  
• We got out of one farm complex this quarter that didn't make sense for us. We're not seeing any expansion in that side of the business in the United States. I know the concern you all have relative to corn prices and the impact. The last time corn gotten to these ranges, over $6, what it did to the company's P&L. I think if you look at the futures market, that's not going to happen again. As well, we have been smart again on the futures side and we have taken protective hedges to ensure that if these corn markets get away from us, that we will not suffer to the extent of the market as a result of that. We've got nice positions. We've got nice profits in these hedges and we've got corn hedged at very favorable prices relative to the market. So that gives me a lot of comfort, a lot of comfort, as I look at this Hog Production side of the business.
  
• From a balance sheet standpoint, Bo will speak much more clearly about that. But we have a balance sheet; I think we've used the word, a fortress balance sheet before. But we've done a lot there and the finance team has done a terrific job there. And I'm extremely proud of the job they've done over the last two years in paying down debt and repositioning the company from a credit standpoint, as well as maintaining substantial liquidity.
  
• (Robert W. Manly) I'm delighted to report that record profit in our recent fourth quarter complements the record earnings in each of the prior three quarters. This winning string combines to make the full year's $521 million net earnings and $1 billion operating profit turnaround extremely exciting. I'm confident as well that we have put in place many opportunities to continue this momentum into the new fiscal year.
  
• Our fourth quarter net income was $98 million and $521 million for the full fiscal 2011. This compares to losses of $5 million and $101 million in the respective periods in the prior year. Oh, what a difference a year can make.
  
• The record earnings result in a quarterly EPS of $0.59 and $3.12 per share for the full year.
  
• We have moved away from a pure commodity corn play reducing our annual exposure by 100 million bushels or 40%. We've improving our Hog Production operations to transfer our cost structure into a competitive advantage. We have reduced debt from $4 billion to $2 billion over the last three years, creating a fortress balance sheet and on the way to lowering interest expense by $100 million annually.
  
• Now, for the details: consolidated sales for the quarter increased 7%, while full-year sales increased $1 billion or 9%. All segment sales benefited by dramatically higher unit sales values. Fresh Pork volume was down for both the quarter and year, closely reflecting the closure of our Sioux City Fresh Pork plant a year ago. We project ourFresh Pork volume in 2012 to be equivalent to the past year.
  
• Packaged Meats volume for the quarter and the year were down 2% and 4%, respectively. We believe we are close to an inflection point in Packaged Meats volume.
  
• With raw material cost increasing 14.7% over the same quarter last year, we were able to increase our prices 14%, recovering 95% of incremental raw material cost of goods sold. We believe we've begun to gain momentum and forecast Packaged Meats growth of 3% to 5% for the full year.
  
• Pork Operating Group profits achieved record-setting performance. These Fresh Pork operating margins per head were $17 and $15 for the quarter and full year, compared to $1 and $2 respectively a year ago.
  
• Hog Raising costs were $57 per hundred-weight in the fourth quarter compared to $53 per hundred-weight the year before. Full year Raising costs in 2011 were $54 per hundred-weight. We expected EBIT heads adjusted Raising cost to rise on a quarterly basis with higher corn prices from the low 60s early in the year and flatten out into the middle 60s by midyear.
  
• Improvements in equity income of affiliates reflect stronger profits in Mexican joint ventures and better annual results in Campofro year-over-year but Campofro had a small loss in Q4. Depreciation in Q4 and the full year were $57 million and $227 million, respectively.
  
• Full-year depreciation for fiscal 2012 is projected to be $241 million. Full-year capital expenditures in fiscal 2011 were $177 million, substantially less than depreciation for the third consecutive year.
  
• Capital expenditure discipline in three tough years have significantly underspent depreciation. Pent-up capital projects offer significant opportunities to grow our Branded Packaged Meat and Export business.
  
• CapEx in fiscal 2012 is presently pegged at about $250 million, but major capital expenditure projects could have a modest impact on incremental spending in the second half of the year and in fiscal 2013.
  
• We expect our full year 2011 estimated tax rate to be 31.2%, a kick up from the 30% to 31% offered in our last quarterly call. The resulting Q4 quarterly tax rate is 31.9%. We expect our 2012 full year ETR to be between 32% and 33%.
  
• The balance sheet story is highlighted by debt reduction of $944 million during this last year. We ended up the year with over $375 million in the bank and no borrowings on our $1billion ABL facility. I am pleased to report that last week, we replaced our ABL facility with two new credit facilities led by Rabobank, providing $1.2 billion total short-term credit capacity, an increase of $200 million.
  
• Our cash has grown too. Today, we have balances of $450 million and a total available cash and liquidity of $1.5 billion. The new three and five-year facilities offer dramatically lower interest rates and expenses with much more flexibility. We have dramatically smoothed our future maturity towers, leaving total debt maturities in each of the next two fiscal years of only $150 million per year.
  
• Our current balance sheets, with dramatically lowered debt levels, lower interest expense and stronger EBITDA have dramatically improved our credit metrics. Net debt to capitalization ratio at year-end was 33%, debt to EBITDA coverage, 1.8 times and interest coverage at five times. Oh, what a difference a year can make.
  
• (C. Larry Pope) On the Fresh Pork side, the margins early on have been somewhat lower. Although I'm not the least bit worried so much. We do have some big comps up against us. But the future's still in front of us. We were at this point last year. I certainly had no idea that the Fresh Pork business would turn out to be as good last year as it did. Had you asked me the same question, I have a better outlook this May, or now I guess it's June, this June than I did last June, so we'll have to see.
  
• Finally, I think you saw this morning that we issued a press release indicating that our Board has authorized $150 million stock repurchase authorization. We are bothered by the level of our stock price. We believe, as many do, that our stock is undervalued. We believe that we are delivering a solid performance year after year in our Pork Group and we believe that the market is not fully understanding that.
  
• (Q&A) I appreciate that for competitive reasons you don't want to give too much detail on your corn hedges, but you did seem fairly optimistic there, at least on your ability to maintain profits if corn goes up. Any detail that you can provide us on the level and/or the duration of some of your hedges? That would be helpful in terms of modeling. (A) Ken, I know that we don't like to give so much of that, but we think that from a corn standpoint, we've got something resembling a 50% hedge against our grain for the year at prices well below the current market. How about that?
  
• And can I assume that that's mostly front-loaded in the year? (A) You could say it's more front-loaded but I wouldn't put so much on that. We've got some protection for the whole year. (A)I think, Ken, this is Bo. Focusing in on our most structure, it will start to reflect higher cost of corn going forward but I think I've indicated, we'll probably have a low to mid 60s price as we start off the year and then moving into the mid 60s and should be able to hold it in that range assuming that things don't run away. But if they do, as Larry points out, we have a pretty good protection base here. So we feel pretty confident about our position.
  
• I guess my question was on the Packaged Meats side. So, Larry and Bo, when we think about the top line, are we starting to get finished with the rationalization process? Or should we be modeling any growth? And then, also, the normalized margin range that you guided to, does that include that bump in marketing? (A) If I can address that. We're looking for modest growth in the 3% to 5% range. We have had some particular product categories where we have seen significant growth and some very, very good margin branded business. Kretschmar Deli is one; Marinated Pork would be another.The margin structure we described with a normalized range of $0.10 to $0.15 would include the marketing expenses that Larry has referred to, yes.

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