On the verge

by Kimberlie Clyma
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Two years ago Smithfield Foods lost more than $250 million, and now it is undergoing one of the most notable transformations of the protein industry as it’s on the verge of reaching its highest profit level on record. Under the leadership of CEO C. Larry Pope and CFO Robert “Bo” Manly, Smithfield has restored its balance sheet, improved its hog and pork operations and defined a new business focus toward branded processed, packaged meats that is aimed at delivering the company a record year in 2012.

The company is coming off three record quarters and hopes to finish its fiscal year (the results of which will be released by mid-June) with record-breaking profits. “Having a record year following two bad years shows a dramatic change in our business,” Pope said to the BMO Capital Markets Farm to Market Conference in mid May.

The company’s Pork Group – the meat processing side of the business – has had four straight record years. “Low hog prices, high hog prices, difficult financial times coming out of a recession, the pork group has continued to deliver – year after year after year – record profitability,” Pope said. “That is a result of many of the changes the company’s made over the last several years in terms of the way we have been structured as independent operating companies by consolidating those operations and consolidating some of our sales organization. We are optimistic going forward in the next fiscal year that we will continue to be solid.”

Smithfield Foods is the No. 1 world pork processor with 31 percent of US hogs processed and fresh pork sales of $4.4 billion and packaged meats sales of $5.6 billion (as of sales during its 3Q, 2011 FY). The pork segment accounts for 71 percent of the company’s $12 billion in sales – 32 percent fresh pork and 39 percent packaged meats.

Smithfield brands are ranked No. 1 in numerous packaged meats categories (31 percent of its sales volume is comprised of ham, 21 percent for bacon, 19 percent for sausage, 12 percent for lunch meats and 10 percent for hot dogs). The company’s pork segment accounts for $10 billion in sales (56 percent for packaged meats, 44 percent for fresh pork) with an operating profit of $668.2 million.

On the packaged meats side, Smithfield accounts for 817 million lbs. of packaged meats sold. It’s the No. 1 pork supplier to foodservice, with 25 percent market share; No. 2 pork supplier to deli; and No. 1 supplier to export.

Lessons from loss

Reflecting on the company’s past losses, Pope pointed toward its live production side of the business as shouldering a large part of the responsibility. “The live production business is the side of the business that drove us down for the two years of losses,” he said. “Grain markets went up sharply, the live hog market didn’t move at all and we couldn’t raise prices at retail. We lost lots of money raising hogs.”

However, it’s not enough to simply assign blame. Returning to profitability means learning and implementing changes that will help prevent backsliding. A large part of this process has involved restructuring the pork group. Over the past year-and-a-half, changes have included reducing the number of independent operating companies in the group from seven to three and reducing fresh pork plants from nine to eight. There were 36 packaged meat plants, and now there are 30. Three fresh pork sales organizations have been reduced to two. Restructuring also eliminated two of the existing three export sales organizations and seven of the previous 10 retail packaged meats sales organizations. In addition, the pork group now operates on one computer system instead of 20.

An even larger, more impactful part of the restructuring plan has been the company’s elimination of brands. Before there were more than 50 brands that fell under the Smithfield umbrella, now it’s been reduced to 12 core brands, Pope said.

“Looking at our brands, we’ve segregated who we’re going to support, which brands have pull and which don’t,” he said. “We are increasing our consumer marketing substantially this year to support those brands and we believe we will recover that in our margins.”

Reducing corn dependence

As the impact from corn’s record-high prices trickles down the food chain, food companies continue to feel the sting. Smithfield has multiple strategies in place designed to reduce the company’s dependence on corn. “We have substantial hedges in place to control corn prices, and we have hedges in place to take advantage of the live hog markets out there,” Pope said.

The company has reduced its domestic exposure to the corn markets by 40 percent since FY 2008. In 2008, Smithfield used 214 million bushels of corn. In 2009, the amount was reduced to 185 million bushels following the reduction of the US sow herd. In 2010 it went down further to 160 million bushels, and then 150 million bushels in FY 2011, following the sale of the company’s turkey interests in Butterball. Plans continue to reduce corn usage to 128 million bushels in FY 2012.

“We are attempting to change the face of this company to lessen the volatility and risk to our business,” Pope said. “What we’ve been doing is exiting the parts of the business that don’t directly tie to the packaged meats side, more specifically, some of our live production operations.”

Smithfield has sold 15 percent of its live product farms. “We’ve made a decision we’re only going to raise livestock that go into our plants,” he said.

“We’re trying to move this business to a more stable, processed meats/packaged meats branded driven business,” Pope added. “We want to be more tied to brands and packaged meats and have less volatile exposure to the fresh meat market.”

Plans to reach record sales in FY 2012 once involved Smithfield’s intention to acquire Campofrío Food Group, the Madrid-based food company that is currently the market leader in the European processed meats market. Smithfield has had a $400 million investment in Campofrío for a number of years, but it recently made moves toward increasing its ownership to obtain full control of the company.

But early in June, citing adverse economic conditions in Europe and recent declines in its stock price among other things, Smithfield Foods announced an end to negotiaitons regarding its proposed joint delisting takover bid, together with Pedro Ballve, to acquire the remaining shares of Campofrío Food Group SA.

“While the acquisition of Campofrío would have furthered Smithfield’s long-term strategy of becoming a leading global consumer packaged meats company, we feel it is in the best interest of our shareholders to terminate negotiaitons at this time,” Pope said. Smithfield remains committed to holding its 37 percent stake in Campofrío.
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