Yeah, perfect. Well, good afternoon, and thanks for joining us just after lunch. Next on stage, we have Smithfield Foods, a leading packaged meats company and the largest pork processor in the U.S., with a very large integrated operation. With us today are Shane Smith, President and CEO, as well as Mark Hall, the company's CFO. Well, Shane, first of all, great to have you here for the first conversation in a couple of years after you re-IPO'd earlier last year. Good to have you back. Maybe just to begin with, I'll hand it over to you for just some general opening remarks, and then we go into questions as it relates to the recent announcement.
Yeah. Well, thanks, Ben, and thank you all for being here. I was wondering what it would look like if we scheduled this over lunch. I think I now have my answer. It is great to be here, Ben. This has been a great conference. A little bit about Smithfield. For those of you who don't know us very well, we've been in business. Actually, last week was our 90th anniversary, so we've been in business for a long time. I would tell you, we are a very different company today than we have ever been in our history. What we have built pre-coming back to the U.S. IPO market was a much more durable earnings model, and it's really been built around three priorities.
Grow our packaged meats business, improve whole hog utilization in our fresh pork business, and then rightsize our hog production segment. We've been executing on those three strategies for a number of years now. The second quarter and first half of the year was really a good example of how that strategy is working for us. We did deliver record-setting second quarter and first half operating profit, and that was despite a consumer environment that, quite frankly, remains very challenged. Commodity markets on the input side of our business that have remained much more, or become much more volatile. Earlier this week, I'm sure you saw, we did announce that our upstream segments, particularly in our fresh pork business, have been unfavorably impacted by some of those market pressures I was just talking about.
The USDA pork cutout, particularly the ham primal within that cutout, has declined significantly since we gave that outlook back in early August. That's resulted in an overall lower outlook for that part of our business. To a lesser extent, we did lower our Q3 outlook for hog production. Hog prices have come down in correlation to the cutout that we were just talking about. While we're seeing pressure in these two parts of our business, we are still extremely encouraged by the momentum that we're continuing to see in our packaged meats business. We are expanding our distribution. We've gained share in key categories. We're seeing returns on innovation across our portfolio. We're also attracting younger consumers, so we're seeing a younger consumer base buying our product. We're really excited about how the business is continuing to evolve.
And most importantly, I would tell you what is different today than at any other time in our history is the strength of our balance sheet. We have an extremely strong balance sheet, and that gives us a lot of financial flexibility as we continue to think about growth, and continue to think about investing for the long-term health of the business, as well as creating value for our shareholders. Overall, while the operating environment is very dynamic, Ben, we feel really good about where we are positioned in this environment and on our ability to execute. We can open up to questions if you have them.
Well, maybe just picking up on that and some of the details you have explained. So how was that change over the last four weeks? Because you obviously had earnings just about four weeks ago.
Yeah.
Reiterated guidance there. Well, made some adjustments to guidance, but nothing of that magnitude.
You did the pre-announcement with more details on Q3. So maybe what were the drivers of those changes, and how should we think about the path forward?
Yeah. Again, I would lead off with the guidance. We reaffirmed our packaged meats guidance.
Yes.
We are still really excited and see a lot of momentum carrying into the second half of the year for our packaged meats business. The call down was really isolated to the commodity inputs on the fresh pork and hog production side of the business. First, one of the main things that changed since our August report is in the USDA pork cutout. That cutout declined a lot further than our expectations, and it really compressed the overall industry gross margin spread. Specifically, again, inside of that cutout, when you look at the ham primal component of the cutout, ham values have declined materially. They are down about 25%, or came down about 25% down in the low $70s. That is for a number of reasons, whether you can point to the ham market, you can point to recovery in Mexico, for example, of some of their herd.
You can look at total international markets. It just has created a lot of short-term pressure on the ham complex, which in turn drove that spread compression. When you look at the spread altogether, the spread was down about 50% compared to July. August compared to July. It was down 50% compared to August of 2025. A lot of short-term volatility compressing that spread on the fresh pork side. Then on the hog production side, the way hogs are priced in the U.S. through the CME index, a large part of that is tied to the meat values. As we have seen meat values come down, we have seen a corresponding decrease in the revenue side in our hog production operations. Bottom line, what I would tell you is this is not anything structural. We are still executing our strategies. We are still investing in our businesses.
This is really what I think is some short-term volatility that we are seeing in the commodity markets.
Okay. Talking a little bit more detail on fresh pork maybe first. The spreads have obviously been softer year-over-year. But you are still potentially looking for some recovery into 4Q. Is that supply demand driven? What would you say is the driver behind that?
Yeah. I would tell you that we will provide an outlook for the full year, fourth quarter, when we do our earnings call a little bit later. What I can tell you today is that fresh pork, in general, is a spread business. The industry gross margin spread is the largest single variable in profitability and performance in fresh pork. Q3, again, the spreads have been more challenged than we anticipated back when we issued our original guidance in early August. The fourth quarter is typically seasonally the strongest quarter for fresh pork. Historically, we would be seeing that historical rotation between hog profitability and meat profitability due to holidays, cooler temperatures. Typically, we would see fresh pork showing profitability or their strength in Q1 and Q4, and for hogs, it is more Q2, Q3. So some normal seasonality would come back.
But to investors, we would advise you to look at and monitor the USDA cutout, and specifically inside of that cutout, how hams and bellies are trading. Right now, that is having the biggest impact on the overall spread component.
Okay. On the execution side, obviously, there are a couple of specific actions that you have taken to offset that.
spread compression. What else could you do to really maximize dollars per head in your whole hog utilization program?
Yeah, you are right. Historically, we have been successful in offsetting a large part of the spread when we see compression. I think if you looked at our results for the second quarter, I think that is the biggest proof point of how that is working. We saw industry spread compression in Q2 of unfavorability of about $37 million. From the things we are executing inside of fresh pork, we were able to offset about $21 million of that $37 million, and that is a combination of things from our Next Selling strategy. That is talking about how we look at the channels, how we sell our meat and the offal product, whether that is through export markets, through our pharmaceutical chain, through pet food, which is something we have really been leaning into the past few years.
We are looking at every pound and where it goes in every channel, and what has the highest Net Realizable Value. How do we create the most revenue out of that hog? Some of the things we have been doing in fresh pork to offset some of the spread compression is also in value-added. We have taken a lot of the lessons that we have learned as a company in packaged meats and think about how we apply that on the fresh pork side from branding fresh pork, from creating value-added fresh pork. You can think of case-ready and marinated and things like that. We have been pretty successful there. In Q2, our case-ready or our value-added part of our fresh pork business was up about 4%. In food service, we have really leaned into the fresh pork going into food service chains.
Our fresh pork on a sales basis in Q2 was up about 12%. Our volume in food service was up about 8%. Again, looking at how do we get more of the pieces and parts of the pigs that we do not eat into things like pharmaceuticals. You can think of things like the pancreas, pituitary glands, mucosa coming out that we make heparin with. Looking at how we continue to do those. Internally, a lot of what we have been focused on the last, I would say, five years or so is really about how do we invest in automation so that we lessen our reliance on labor, we become more efficient, we take cost out of the system.
We've really been focused on that to bring down that cost structure so that on the commodity side of the business, we're really lessening that exposure to volatility like we've seen in the last few weeks on the spread.
Okay. Got it. You've talked about some of export stuff, et cetera, and obviously -
the fresh pork business is very international. How is currently demand in some of the key markets, especially with the fairly high Chinese demand?
Yeah. For China, I think it's important to level-set what we sell to China. On a consolidated Smithfield basis, our sales to China represent less than about 2% of our total company sales. What we sell to China is offal product. We're not exporting meat to China. We haven't exported meat to China in many years now. We're selling the pieces and parts of the pig that people typically don't eat here in the domestic market. You can think of things like ears and stomachs and kidneys and those type of things that are going to that export market. China is an important market for that product. We don't expect to see much change in the China market given their domestic surplus. China has really recovered very strongly from ASF. We don't expect to see meats begin to move.
We do still think there is a little bit of a deficit on the offal side. There is a higher level of demand. One thing that I think gives us a competitive advantage is we have been there a long time. We have a sister company there where we are actually selling with boots on the ground. That gives us some type of advantage in that. You look to other Asian markets in the export arena, so Japan, for example, we are seeing good growth in Japan. We have been experiencing really solid growth in Japan. Mexico is a very important trading partner for U.S. pork. It is an important trading partner for Smithfield. Demand there does remain strong.
But again, if you go back to my opening statements on the ham complex, we are seeing some pressure on the ham markets coming out of Mexico, and I do think that is a little more near- term than not. Key point in exports, the way we think about exports in international markets, we have access to over 30 different export markets around the globe. We look at each of those markets to fulfill a specific piece of the whole hog balance. So one market may be really good for offal product. Japan may be really good for butts. Korea may be really good for loins, Mexico really good for hams.
So we look at the export markets as a way to, again, go back to that Net Realizable Value model for fresh pork to make sure we are getting all the dollars that we can for that whole carcass or that whole pig as we harvest it.
Okay. Moving further on the integration side, hog production, obviously, another thing that has been touched on the guidance. We have seen that the pork cutout has just trended lower despite drop in slaughter. What do you think has driven this, and do you see any upside potential? Also, what reports, data points are you looking at as you evaluate supply-demand for just the coming couple of months?
Yeah. This year, again, the biggest issue with the cutout has been the demand and mix that exists within the cutout, particularly hams. Again, I go back to that global supply and export market competition have really weighed on those ham values. Again, that's led us to an extremely challenging third quarter when we think about it in the context of the market spread. At the same time, USDA has lower cutout prices, again, just pressuring the CME market to go much lower. We look at a number of reports, Ben. So we're looking at everything from the USDA, with their outlook on hog production, farrowing intentions, all of the things that go into building up through that commodity chain.
I do think as we move seasonally into a stronger fourth quarter, we'll see some upside, and that would come from greater demand, as well as seeing some of the supply tightening. If a hole in production develops later in the year, then that will also create some upside, both in meat values and in hog prices. I do think that pork today remains very strong relative to beef. But consumers are still price-sensitive right now, and I don't think it's a surprise to anyone in the room some of the pressure that the consumer is facing. When we talk about hog production, if you look at the June Hogs and Pigs report, they're reporting that the breeding herd is down about 1.2%. That's being offset by some productivity gains across the industry. Then you look at the cash market, the cash hog market.
It's remained, I would say, relatively strong so far this year. I don't know that there's any other specific reports that we may look at, but it's really an accumulation of a lot of different data points.
Okay. Got it. Within hog production, I remember when you did the IPO process-
Yeah
It was all about the medium-term goal to actually further reduce internal headcount.
Target, I think, was around 30%.
Where do you stand right now on that journey? What's the missing pieces, and is 30 the right number? Should it be lower? How should we think about this?
Yeah. When we started our hog production optimization strategy four or five years ago, at that time we were producing about 17.5 million hogs across the U.S. We looked at that strategy and all the changes that have taken place since it was implemented and said, "You know what? We don't need to be 50% vertically integrated. Let's find the right number." When we arrived at a number and a goal of reducing our herd to 10 million, it was really a function of math. We looked at each of our seven harvest facilities across the U.S., and we looked at what is available in that area. Is there an independent hog producer base that we can pull hogs from, or is this an area to support the plant that we need to grow our own hogs?
To give you an example of how different that calculation can be, our Sioux Falls, South Dakota plant, which is our second-largest facility, we are probably less than 2% vertically integrated, meaning 98% of the hogs that we bought to supply that plant are coming from independent hog producers. You contrast that to an East Coast plant, where that model was built more on contract grower relationships. We are probably 75%-80% vertically integrated. If you do the math across all seven harvest facilities, what is available, what is reasonable, how do we continue to support fresh pork so they can continue to support packaged meats, the number we come to is about 10 million hogs, or the 30%
Okay
you alluded to. Go ahead.
Yep. Okay.
I think it is important. 10 million for us, it is not written in stone, and so we will get to 10 million, and we will further evaluate what other opportunities do we have to maybe go lower. In general, I would say the strategy is only grow the number of hogs that you have to support, again, the fresh pork business and ultimately the packaged meats business.
That makes sense. Is there anything you can do? We saw the guidance was down a little bit, but are there things within hog production that are actually under control where you can potentially do operationally to outperform industry margins? Because one thing is where the industry is at and so on, but given the size, any opportunity to outperform here?
Yeah. We use a number of tools, and we've done a number of things inside. I would say, for the 10 million hogs out of that initial 17.5 that will remain in Smithfield, they're in a much better cost structure today. In many cases, I would tell you, they're in the top 5% or 10% of cost structures in the U.S. We have completed what was a five-year genetic changeover. We've invested in feed initiatives, so how we buy grain and then how we mill that grain and feed it. We've invested in health and biosecurity initiatives, and we've seen that cost structure come down, where today you look at some of the external public models that are out there to show you how a good farm is performing. We're exceeding that model now. We've done a lot of work there.
At a higher level, we do have a really robust hedging program. We've been hedging, whether it's corn and soybean meal on the input side or whether it's hog prices on the output side. Even on fresh pork, where we're buying that other 20 million hogs now, we're maybe buying some hogs, using hedging instruments to protect the purchase side of that equation as well. There's a lot of things we do to help lock in or pick points of entry and points of exit in our hedging program, and it's a really good program run by some really smart people.
Okay. You touched on cost a little bit.
Obviously, grain is one at the very beginning, but then the subsequent ones, loins, et cetera. It has been very volatile and actually on the up as well to a degree. As things normalize, how should we think about that flowing that into results? I mean, all this disruption right now.
Mark, you want to take this?
Yeah, sure. We expect in the back half of the year that we will see lower pork raw materials flowing through the packaged meats business, which will create a tailwind, particularly in the second half for bacon and other formula-priced product categories. As a point of reference, we flip 100% of our internally-produced bellies over the wall, so to speak, from our fresh business to packaged meats for further processing. That lower belly price is going to be a direct benefit to our packaged meats benefit. But that benefit does lag from a timing perspective in terms of inventory timing and how that flows through, as well as the contract structure that we have with our customers. But I would say that that is only one part of the bridge for the second half. It is not the whole story.
I would say freight and diesel, and resin for that matter, continue to be headwinds alongside our deliberate step-up in our investment in brand marketing. It is going to counterbalance a little bit of that favorability on the raw material side. But as Shane stated, we have reaffirmed our guidance on packaged meats and we are looking forward to a very solid second half. I would say the larger fourth quarter drivers for packaged meats are really around the expanded distribution, the gains that we made in the first half of the year, the increase in marketing spend that we have put forward, and it is our continued innovation and mix improvements across the categories, along with the normal seasonality in that fresh pork business. The quarter is seasonally very strong for us with the two holidays. So, we are looking very solid for the back half of the year in packaged meats.
Okay. You previously also talked a lot about volatility in fuel, logistics, everything that is kind of related to the Middle East. Now even grain costs, et cetera. As you look at some of these cost headwinds, how is that going to impact you? Is there anything else that is kind of like a watch item on the horizon as it relates to cost?
Yeah. As I mentioned, freight and diesel and resin-based packaging remain elevated, and our outlook assumes that that continues throughout the second half of the year. Diesel and freight really hit in the second quarter. Resin, that impact is beginning to flow through in the second half of the year. So it will be more meaningful as the contracts reset. But freight is as much a capacity story as anything. It is about the driver eligibility enforcement that has tightened supply. About 200,000 CDL licenses came out across the network, and we are not looking for a real improvement in that until perhaps the back half of 2027. But we have a well-established playbook that we have been executing in terms of network optimization and lane consolidation. We have successfully taken out over 1 million miles driven year- after- year for the past two years.
We are doing some selective mode shifting in terms of our private fleet, our dedicated, and then also an increase in intermodal transport. Also executing our procurement strategies along with hedging and value engineering where possible. So, the last resort is kind of through price increases across the portfolio. I would say in terms of other headwinds, we are watching beef and turkey. Those costs have remained elevated. But again, we are looking for overall improvement in the raw material profile in the back half of the year.
Okay. Taking that all then back to the packaged meats business. I mean, we have heard this a lot here at the conference with the consumer being cautious. There is obviously a little bit of an imbalance of where to spend money. How have you guys adapted to that more cautious environment, and how can you defend market share?
Yeah. I would say the consumer is undoubtedly more cautious or more deliberate today as they look for value, but I do think that protein is staying a priority. When you look at the proteins, I think pork offers a really compelling value story versus the other proteins. For our business, we play the full value spectrum. So we have premium brands, we have mainstream brands, and we have value brands. Then if you move out of brands altogether, about 40% of our business at retail is in private label. So as that consumer moves up and down the value spectrum, wherever they choose to spend their money, we have something to offer.
And you see that in the results that we had, like at the end of the first half, our packaged meats volume was relatively flat, while the 25 categories that we operate in, the volumes were down over 4%. So we were able to maintain our volumes and take some market share. We've also leaned really heavily into innovation, and we're seeing some quick returns on some of the products that we've come out with. And one of those is the Nathan's Famous Grass-Fed Beef Franks that we just launched about a quarter ago, which already has a 40% ACV. So we're seeing just tremendous trajectory in that product as it's gone to market.
Then you look at some of the other things that we're doing as a company, coming out with meal-ready cuts, looking at how do we provide a more convenient product, different flavor profiles, look forward to meal solutions. Some of those we launched back in April, and they're all doing really well. And again, if you look at the results of some of those things that we've been doing, our overall volume share, we gained share in five of our $1 billion+ categories, meaning $1 billion of total category opportunity. Our points of distribution were up 6.2% in the first half of the year. If you look, we've really been leaning heavily into e-commerce and being in front of that consumer. We've seen our e-commerce volume growth up almost 22%, outpacing the normal e-commerce growth for the industry.
So we've really been leaning into these things, and I think as we go into the second half of the year, that's the momentum that we're carrying forward out of our packaged meats business.
Okay. You have talked about it like the portfolio within packaged meats.
You have branded, higher value, but you also go down all the way to private label.
Yep
Does that have any impact as it relates to segment profitability, or is that all more or less the same?
You want to talk to that?
Sure. As Shane mentioned, we compete across the price spectrum. So we have Nathan's and Prime Fresh that are at the high end, the premium side of the business. We also have a presence with a branded product in the mid-tier and the value side. As Shane indicated, we also do participate, about 40% of our business at retail is in private label. So as that consumer trades down across the branded portfolio, if they were to trade out of branded and into private label, we are able to have a stickier customer retention. So they are not trading out of a product that was not ultimately produced by Smithfield. We have also done a lot of work on improving what was a more vast margin discrepancy between branded and private label products. We went through a significant SKU rationalization process.
We also went and reformulated a lot of our contracts so that the underlying margin differential has been eradicated. I think the proof is in our results. We still had a relatively stout second quarter print in terms of our segment profit in packaged meats of 13.1%. We continue to keep that balance of private label and branded around that 60/40 mark. So it is really about driving that customer relationship and really managing the category versus a volume and price discussion. We have been very successful with that.
Yeah. Is that then also fair to say because of that portfolio, despite what has been happening, as you said about a month ago, implied the fourth quarter has to be strong? There is the seasonal effect. You have talked about this, but that gives you additional confidence to actually deliver on the Q4?
Yeah, I would say our confidence comes from the factors that I mentioned that are already in motion. As a reminder, the fourth quarter, if you are thinking about packaged meats, is seasonally that is our strongest quarter. Again, I go back to some of the things I said earlier. From a distribution standpoint, in the first half of the year, we increased those points of distribution over 6%. We have continued to invest in our marketing. So we have increased our marketing investment. We have launched a number of new products, and all of those products are gaining traction at retail. I mentioned the Nathan's Grass-Fed, Mark talked about the Prime Fresh, and those are two great examples of programs that are going to contribute more fully as we work through the back half of this year. We are also benefiting, quite frankly, from some timing and seasonality of the business.
The fourth quarter in packaged meats is a really important selling season for us. And 2026, this year, because of our accounting calendar, will include a 53rd week, and that will provide also some incremental contribution, although it's not a major driver of what will be our total overall outlook. The confidence that we feel is the things that we execute against every day. It's those things that we did in the first half of the year that we have done across 2025 to set us up as we go forward, not only in the back half of this year, but as we go into 2027 as well. I'm very excited and very optimistic about our packaged meats business and the things that we're going to continue to see coming down the pipe.
Yeah. Now, wrapping it up, obviously you have a very strong balance sheet as we look at just priorities, CapEx versus M&A, a few things pending.
Leverage sits at 0.4x , things not probably called ideal. You have very strong liquidity as of the second quarter, way over $3.5 billion. So what's your plan to deploy that cash?
How should we look into potential shareholder return investments? What's out there?
Yeah.
Sure. I'd say our capital allocation priorities are unchanged. It is really about first reinvesting in the business, so about $350 million-$450 million annual on capital expenditures, with roughly a 50/50 mix between maintenance type projects and growth capital projects. So quick return on investments, either capacity expansions, efficiency and yield gains within our plants. Second, it is a focus on a reliable and sustainable, and growing dividend, currently at $1.25 a share on an annual basis. We will look at disciplined and synergistic M&A as we have done in the past with the Nathan's announcement and also with the acquisition of dry sausage capacity in Nashville, Tennessee. We are going to focus on maintaining that strong balance sheet and really it is about having flexibility through the cycle for us. We generated more than $1.1 billion of operating cash flows for the last 12 months.
We have the capacity to do all four of those priorities at once.
Yeah. You talked about investing in the business. You are building a new plant in Sioux Falls. You mentioned that earlier on.
How do you expect this project to actually reshape your portfolio? Because it is in replacement of one. How is that going to implement margin enhancement? How should we think about that?
Yeah. I would tell you, I am very excited about the opportunity to rebuild Sioux Falls. Sioux Falls is our second largest plant, but it is one of the oldest plants in the industry. It is over 100 years old. When we look at technology, we look at automation, quite frankly, in many cases, it cannot fit into the footprint. As we rebuild Sioux Falls, this will take this plant not just to one of the best performing plants in our footprint, it will be the best performing plant in the country. We are continuing to make good progress. We are working through the permitting process. The anticipation is that we will break ground in early 2027. Construction will end at the end of 2028, and we will be running the lines in very early 2029. We still do have some regulatory hurdles and approval processes to go through.
But strategically, if you think about Sioux Falls and its location, we are looking at it as an opportunity to build not only a fresh pork plant, but a packaged meats facility attached, so a combo plant.
It is going to allow us to optimize a lot of our overall footprint. We are going to have some of the highest levels of automation, so we are going to see opportunities coming out of both yields and labor efficiency. It is going to really tighten that link we have between fresh pork and packaged meats. At the end of the day, this is going to be the best in-class cost structure of all facilities in the U.S. So I am extremely excited about the opportunity to not just change the Sioux Falls facility, but change the whole footprint.
Got it. Then one last one real quick on M&A. Nathan's, I think is still pending. Any update that you have here, and if you expect it to be accretive? Is there anything else that you maybe have an eye on?
Yep. Mark, you want to
Yeah. Again, Nathan's is still subject to the CFIUS review and the customary closing conditions, but we expect it to close in the second half of this year. So it limits what we can discuss at this time. But strategically what it does for us is it secures our long-term rights to the Nathan's Famous brand that we really have helped grow over the last 12 years. It strengthens one of our fastest-growing packaged meats platform. We can expand that platform in both retail and food service. In terms of future M&A, again, we continue to evaluate synergistic opportunities, but we are going to be very disciplined in our approach. Again, as we have always stated, we do not believe that we need to pay up for brands. We have a very solid stable of brands as they exist today. So it is about reinvesting in those brands.
It is about adding capacity and capabilities and continuing to grow that value-added side of our business, whether it is in fresh pork or packaged meats.
Okay, perfect. Well, Shane, Mark, thanks so much for coming
Thank you, Ben.
Back on stage and hope to have you next year again.
Yeah.
Thank you very much.
Thank you, everybody. Thank you.