Racing through 2012

by Joel Crews
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Smithfield Foods Inc. announced several years ago its intention to transform the company away from a primary focus on its grain-driven, hog-production strategy in favor of becoming a consumer-focused, value-added, packaged meats company. Providing progress reports on this strategy has been the mantra of CEO Larry Pope and other executives during quarterly earnings reports and at meetings with analysts and investors as recently as this past month.

The approach required the company to develop a four-pronged platform, including leveraging its various brands of products in the US; establishing a steady flow of new product innovations and rollouts; and streamlining sales and marketing efforts to better cover foodservice and retail customers. The fourth prong involves continued development of the company’s consumer marketing efforts, which Pope admits presents ample opportunity. In this arena, he compares Smithfield to a football team that possesses the ball on its own 20-yard line with 80 yards to go. “The opportunity for you, as a shareholder and an investor, is whether you believe this management team can move the ball down the field,” Pope said during a May 16 presentation at the BMO Capital Markets Farm-to-Market Conference.

In announcing its fiscal 2012 third-quarter results in early March, the company reported quarterly sales of $3.5 billion, 9 percent higher than the previous year. Third-quarter net income was lower, at $79.0 million in fiscal 2012 compared to $202.6 million the previous year. Smithfield reported net income for the first nine months of fiscal 2012 was $281.8 million, down from $422.6 million last year. The 52-week range of Smithfield Foods Inc.’s stock price on the New York Stock Exchange (symbol: SFD) as of May 31, 2012, spanned from $17.79 per share to $25.12 per share.

Pope said at the time that he was pleased with the company’s profitability during the quarter and the improvement in earnings. “Our year-to-date earnings closely tracked last year’s record results,” he pointed out.

Packaged-meats volumes slipped slightly overall, but the company’s Armour, Curly’s Farmland, Gwaltney, John Morrell and Kretschmar brands realized solid growth in sales and volume in the third quarter. According to Smithfield, packaged meats operating margins were at the high end of the normalized range at 7 percent, or $.15 per pound. Sales of packaged meats were $1.7 billion, an increase of 6 percent over the previous year. Sales tonnage decreased slightly, 1 percent, while share in several categories increased, including bacon, barbecue, deli meats and hot dogs.

Looking back at the holiday season, Smithfield benefited from spikes in its sales of bone-in hams, a category it is consistently able to grow in volume and market share. Additionally, “We gained distribution in the BBQ, dry sausage, portable lunches, deli meats and marinated pork categories,” he said in March.

Smithfield’s fresh-pork segment continued its profitable trend as supply and demand balance was maintained through the first quarter. Hog production reported a third-quarter loss resulting from seasonal dips in hog prices, however, demand from Asia and other trading partners pushed double-digit increases in the company’s export business.

“We expect that fresh pork will continue to be a solid contributor to our overall results as US protein supplies contract, supported by ongoing healthy export demand,” Pope said. The company expects average hog production costs to be in the mid $60s per hundred weight for the remainder of fiscal 2012 and drop to the low $60s in 2013.

“Going forward, our focus will continue to be on developing our sales and marketing platform and brand portfolio by increasing direct-to-consumer advertising and building our innovation pipeline,” Pope said as he looked toward the fourth quarter and beyond. “We remain committed to achieving further operational efficiencies and improving our cost structure. We have made significant progress on all of these fronts; however, we are not satisfied with our results and we are pursuing opportunities to further improve our business,” he said.

Part of improving the business includes dialing back its number of brands and focusing on its 12 core brands, which the company reports delivers about 87 percent of the volume in the Packaged Meats segment. Those 12 brands, according to Pope, “are the ones delivering the bottom line to this company.”

As for marketing, Pope told attendees of the BMO conference that the challenge is in convincing consumers that despite Smithfield’s value-priced products, the quality of its products is at least as good as other companies competing in the packaged-meats segment. To bolster marketing efforts, the company has recently recruited a number of executives formerly working in the beer industry to enhance the marketing of a product with a similar demographic as Smithfield’s.

“Let’s use some of the knowledge they have in how to attract that consumer,” Pope said, “who is the same consumer who eats our product. He’s the same one that drinks the Budweiser beer.”

Marketing was also the driving factor behind Smithfield’s decision in December to invest in a multi-year sponsorship deal with Richard Petty Motorsports, which will begin with this year’s Daytona 500. Smithfield brands will adorn cars in 15 NASCAR races as part of the partnership. Efforts were made to market brands specific to the geographic area the races are held, including Farmland and Eckrich in the Midwest and Smithfield in the East.

“Take our brands, put them on the side of a Richard Petty car, you get a lot of press coverage,” Pope said at the BMO event, “you get a lot of air time and it’s the same demographics as the guy that drinks the beer and the guy that eats our product.”

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