Q1 2025 Smithfield Foods Inc Earnings Call
[music].
Good day and welcome to the Smithfield Foods first quarter 2025 results conference call.
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Speaker Change: I would now like to turn the conference over to Zoe Mcneill Vice President of Investor Relations. Please go ahead. Thank you operator, and good morning, everyone. Welcome to sniff fields first quarter 2025 earnings call.
Speaker Change: Earlier this morning, we announced our results a copy of the release as well as todays presentation are available on our IR website.
Speaker Change: He thought Smithfield foods Dot com.
Speaker Change: Today's presentation contains projections and other forward looking statements that are being provided pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of 1995.
Speaker Change: Forward looking statements include all comments, reflecting our expectations.
Speaker Change: Or beliefs about future events or performance that do not relate solely to historical periods.
Speaker Change: These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections.
Speaker Change: These risks and uncertainties include but are not limited to the factors identified in the release in our annual report on Form 10-K.
Speaker Change: Our quarterly reports on Form 10-Q, and our other filings with the Securities and Exchange Commission.
The company undertakes no obligation to update or revise.
Speaker Change: Any forward looking statements, whether because of new information future events or other factors.
Speaker Change: Please refer to our legal disclaimer on slide two of the presentation for more information.
Speaker Change: Today's presentation will also include certain non-GAAP measures, including but not limited to adjusted operating profit and margin.
Speaker Change: The net income adjust.
Speaker Change: Adjusted earnings per share and adjusted EBITDA.
Speaker Change: For a reconciliation of these and other non-GAAP measures to the corresponding GAAP measures.
Speaker Change: Please refer to our earnings press release.
Speaker Change: And our slide presentation on our website.
Speaker Change: With me. This morning are Shane Smith, President and CEO Mark call C F O.
Steve France: Steve, France, President of packaged meats, and deliberate Owens president of fresh pork.
Speaker Change: I will now turn the discussion over to Shane Shane.
Speaker Change: Thank you Julie good morning, everyone. I am pleased to report that we were we are off to a solid start to fiscal 2025.
Speaker Change: We delivered first quarter adjusted <unk>, adjusted operating profit of $326 million and adjusted operating profit margin of eight 6%.
Speaker Change: This marked an 86% increase compared to adjusted operating profit of 176 million and five 1% in the first quarter of 2024.
Speaker Change: In fact, our first quarter operating profit and net income was also a record first quarter for the company.
Speaker Change: Interestingly, none of the business segments individually had a record quarter.
Speaker Change: Results were truly a reflection of strategy execution across the segments and the strength of our vertically integrated model.
Speaker Change: Our strong improvement reflects more favorable market conditions, and our production as well as solid execution on our strategies across the business.
Speaker Change: Looking at profit loss.
Speaker Change: Our packaged meats segment delivered adjusted operating profit of 266 million and an impressive adjusted operating profit margin of 13, 1%, even as we navigated higher raw material input cost and a later Easter this year.
Speaker Change: We continue to increase sales of higher margin products, such as package lunch meats and dry sausage and we achieved operating efficiencies in our packaged meats segment.
Speaker Change: Our fresh pork segment reported adjusted operating profit of $82 million with an adjusted operating profit margin of 4%.
Speaker Change: Executing our strategy to maximize product values across multiple channels helped offset the impact of the tighter industry market spread this year.
Our production segment delivered adjusted operating profit of just over $1 million, which marks an outstanding turnaround from a loss of $174 million in the first quarter of 2024.
Speaker Change: The increase was driven by improved market conditions, and a more efficient cost structure, all not retain farms.
Speaker Change: Across the organization our teams relentless focus on driving efficiencies and delivering cost savings paid off with lower manufacturing distribution and SG&A cost year over year.
Speaker Change: We continue to unlock value through operational improvements by fostering a culture of continuous improvement.
Speaker Change: In summary, our strong Q1 profitable growth versus last year reflects solid strategy execution across our packaged meat fresh pork and hog production segments as well as dramatically improved market conditions in the hog production industry.
Speaker Change: Additionally, we continue to prioritize a strong balance sheet and financial position.
Speaker Change: We ended the quarter with a net debt to adjusted EBITDA ratio of just 0.7 times well below our policy of two times. This gives us the financial flexibility to support our growth strategies and to deliver long term shareholder value.
Speaker Change: Now turning to our outlook for fiscal 2025.
Speaker Change: Today, we reaffirmed our fiscal 2025 outlook that we introduced on March 22, our 2025 outlook calls for increased sales and operating profit despite challenging market conditions and Mark will review the details in a few moments.
Speaker Change: I'd like to briefly review the key initiatives underway to deliver growth.
Speaker Change: First in packaged meats, we plan to continue to grow operating profit through ongoing product mix improvements volume growth and innovation pack.
Speaker Change: Packaged meats is our largest and most profitable segment, representing 54% of consolidated sales with 98% of our packaged meat S. K you sold here in the United States.
Speaker Change: We remain focused on increasing the mix of higher margin product categories, such as package launched mi and dry sausage.
Speaker Change: As evidenced by the shift in our mix away from large holiday hams, some more everyday items.
Speaker Change: From 2019 to 2024, our Ham category volume decreased slightly while the unit velocity dramatically increased by 22% and the profit per pound improve significantly.
Speaker Change: Raw sausage is another way to improve our product mix from 2019 to 2024, we grew dry sausage units about 37% our ability to grow. This category has been supported by increased capacity, including the acquisition of the dry sausage facility in Nashville last summer.
Speaker Change: Sales of dry sausage products, such as pepperoni, and salami are expected to grow at a faster rate than the overall packaged meats category.
We have significant potential to expand distribution of our corrado and Margarita dry sausage brands, which have a C. V's of about 40% compare to our Smithfield consolidated ACB of 93%.
Speaker Change: During the first quarter, we executed well on our mixed shift strategy as evidenced by our double digit volume growth in both lunch meat and dry sausage.
Speaker Change: Turning to volume, we expect packaged meats volume to be up about 1% year over year.
Speaker Change: We are currently the number two brand in provider of package made by volume and the 25 key categories in which we compete.
Speaker Change: 10 of those categories have a market size of more than $1 billion and we strive to grow share in each of these categories.
Speaker Change: One of our major focus areas in 2025 is the continued growth in our Smithfield Prime fresh package lunch meats.
Speaker Change: Package Lunchmeat represents a $6 3 billion dollar market opportunity and we have the number five position and an 8% share base.
Speaker Change: Based on <unk> data Smithfield Prime fresh posted the largest volume share gain of any branded package lunch meat for the 52 weeks ended March 30th 2025.
Speaker Change: Consumers are increasingly looking for value in our portfolio offers quality branded products across multiple categories and price points. This helps us attract and retain consumers even as they look to lower priced options.
Speaker Change: If they choose private label, we are well positioned to capture more private label sales volume private labor was a key competitive advantage for smithville.
Speaker Change: The elevation of private label with retailers and foodservice operators requires them to war with trusted partners like us who can consistently and reliably deliver quality products.
Speaker Change: Our strength in private label has helped transform the relationship we have with our customers into a strategic multiyear planning approach encompassing both our branded and private label products.
Speaker Change: This is exemplified by the recognition of our Smithfield foods sales team, who are delivering outstanding service and category management to our retail customers.
Speaker Change: In March our teams are recognized by Harris Teeter is 'twenty 'twenty four partner of the year for meat and bus save more as 'twenty 'twenty four best meet supplier of the year.
Speaker Change: Finally looking at innovation.
Speaker Change: Addressing consumer trends to shift away from by and large holiday hams to more everyday purchases has been a focus of our innovation.
Speaker Change: Smithfield Prime fresh has been one of our biggest wins in this endeavor, while also addressing consumer convenience trends.
Speaker Change: Fixed core weight pounds represent another successful product innovation to address more everyday use occasions for consumers.
Speaker Change: For the 52 weeks ended March 30th Smithfield branded quarter way Ams gained the most share of any branded or private label offering and the smoked Ham specialty coffee category. According to Chicago.
Speaker Change: We conduct consumer research to determine what is trending with consumers and attracting new purchases. We have a strong pipeline of new products scheduled to launch throughout 2025.
Speaker Change: These new products target consumers through law and extensions of our trusted brands, new flavors and more convenient packaging and sizing options.
Speaker Change: Moving to our second cool growth strategy, optimizing our fresh pork operations, we see further opportunity to grow fresh pork operating profit and 2025 about maximizing the net realizable value of HR and driving best in class operating efficiency.
Speaker Change: We continue to closely monitor the tariff and geopolitical environment, which is very flu.
Speaker Change: We have an experienced team that has worked together for more than 20 years and has navigated through numerous cycles well, we are not immune to the impact of tariffs, we have built flexibility into our system and established multiple outlets for our fresh pork products.
Speaker Change: I thought it would be helpful to explain how we determine the optimal sales channels for fresh pool.
Speaker Change: We utilized four main sales channels.
Speaker Change: First and most important is producing and transferring high quality fresh pork raw materials to our packaged meats segment.
Speaker Change: We recognize a greater value for the company overall, but further converting our fresh pork raw material and selling it through our package mix segment.
Speaker Change: Second we focused on our domestic retail and food service partnerships to look to increase margins by growing the mix of value added products we offer.
Speaker Change: We are the market leader and marinated fresh board with more than a 40% branded volume share in the category.
Speaker Change: We continue to innovate and fresh for meeting customer and consumer needs just as we do in packaged meats.
Speaker Change: Sure we have a well established international sales channel and we export to more than 30 countries around the globe.
Speaker Change: In 2024, Smithfield export sales accounted for 13% of total company sales with the vast majority of that from our fresh pork side.
Speaker Change: The key to our export strategy is identifying the optimal market for our products.
Speaker Change: We continue to execute our next best sales strategy.
Speaker Change: Are you waiting our options in response to the recent tariff actions. We believe are 2025 operating profit outlook range for fresh board dressers tariff risk.
Speaker Change: Finally, we have adjacent business lines, including skins for snacking, and food and penetrate and pharmaceuticals, focusing on coal utilization.
Speaker Change: Multiple scale channels represent a real point of differentiation for our business based on the dynamic market environment, we can uniquely pull different levers across our channels to maximize profitability. We believe this is one of the main competitive advantages of our leadership position as the number one.
Speaker Change: Pork processor in the industry.
Speaker Change: Regardless of the external environment, our fresh pork segment maintained a relentless focus on improving operating efficiencies, we expect to deliver additional savings in 2025.
Speaker Change: Our focus on optimizing our operations goes beyond our packaged meats and fresh pork segments.
Speaker Change: And our our production segment, we were pleased to report a $1 million profit in the first quarter.
Speaker Change: The strong rebound from the first quarter of 2024.
Speaker Change: Both improved industry market conditions as well as our focus on operating a best in class cost structure Ona retained farms through genetic transformation herd health improvements and procurement and nutrition savings.
Speaker Change: We are making great progress toward actively resizing our business, we have reduced the number of company owned dogs produced from a high point of $17 6 million in 2019 to unexpected roughly $11 5 million in 2025.
Speaker Change: Over the medium term, we plan to further reduce our internally produced hog volume to approximately 30% of the needs of our fresh pork segment.
Speaker Change: The recent transition of three 8 million hogs to external producers is going very smoothly. They use agreements assure a consistent supply of hogs from established farming operations with long standing relationships with Smithfield and will reduce our exposure in the commodity markets as we reduced the number of box.
Yeah.
Speaker Change: Across the entire company, we drive a culture of continuous improvement.
Speaker Change: Each year, we look for new ways to improve operating efficiency and to reduce our cost basis with a goal to more than offset inflation.
We expect efficiency savings to again contribute to enhanced profitability in 2025.
Speaker Change: We achieved improvement across our manufacturing platform through initiatives such as automation.
Speaker Change: Within our supply chain, we strive to improve service to our customers while optimizing cost.
Speaker Change: And in procurement and SG&A, we are continuously looking for ways to reduce overall spend.
Speaker Change: In conjunction with this effort, we reduced head count in certain corporate and operations functions during the first quarter streamlining our operations and improving our overall cost structure.
Speaker Change: And finally, we continue to evaluate opportunistic M&A in North America to support our growth strategies.
Speaker Change: In summary, we delivered solid first quarter results that position us well to achieve our outlook for 2025 and to support our growth over the long term.
Speaker Change: With that I'll turn it over to Mark to review our financials in more detail.
Mark: Thanks, Shane and good morning to everyone joining the call in the first quarter, we delivered $326 million and adjusted operating profit an increase of 86% versus the prior year. This outstanding growth reflects improved hog production profitability as well as solid execution of our strategies and our packaged meats and fresh pork segment.
Mark: It's partially mitigated tough year over year market headwinds underscore.
Mark: Underscoring what Shane mentioned, we ended the first quarter with a strong balance sheet and we have the financial flexibility to invest in growth and return value to our shareholders.
Mark: Turning to the details of our first quarter results starting with consolidated results and then a review of our performance by segment.
Mark: Consolidated sales in the first quarter were $3 $8 billion, which was a nine 5% increase compared to the prior year.
Mark: This was primarily driven by higher feed and hog sales in our hog production segment as well as higher average sales prices across our our fresh pork and packaged meat segments.
Mark: As I stated earlier, we delivered adjusted operating profit of 326 million.
Mark: <unk> operating profit margin of eight 6% compared to adjusted operating profit of $176 million or five 1% in the first quarter of 'twenty 'twenty four.
Mark: First quarter 2025, adjusted net income from continuing operations was $227 million compared to $123 million in the first quarter of 2024.
Mark: Adjusted EPS was <unk> 58 per share compared to 32 cents per share in the first quarter of 2024.
Mark: Now turning to our first quarter segment results are packaged meat segment delivered first quarter adjusted operating profit of $266 million and a robust adjusted operating profit margin of 13, 1% in spite of higher raw material costs.
Mark: First quarter packaged meat sales of $2 billion increased by one 2% compared to the first quarter of 'twenty 'twenty, 457% increase in average sales price more than offset volume declines of four 2%, which were driven by lower sales due to the later Easter holiday this year.
Mark: Higher average selling price was driven by higher market prices for the pork value chain with key raw materials, such as bellies and trim up 15, and 30% respectively year over year.
Mark: Additionally, the higher average selling price was influenced by a continued favorable mix shift to higher margin items, such as lunch meat and dry sausage.
Mark: Turning to fresh pork for the first quarter of 2025, we delivered operating profit of $82 million and an operating profit margin of 4%. This is down from $110 million and five 7% in the first quarter of 2024, when we benefited from an unusually strong industry market spread between the U S D a cutoff.
Mark: Hog prices.
Mark: In Q1 2025, the industry market spread was compressed as evidenced by a 14% increase in the CME lean hog price year over year, while the USDA cutout rose only 6% in the same timeframe.
Mark: We were able to partially offset the tighter industry market spread with our continuous improvement initiatives to deliver cost savings in manufacturing and distribution.
Mark: <unk> segment sales of $2 billion increased four 9% year over year. This was driven by an average sales price increase of four 8% and flat volume.
Mark: Lower pork supply and steady demand drove the USDA pork market prices up year over year.
Mark: Turning now to Hog production were pleased to report a $1 million profit for the first quarter of 2025 versus a loss of $174 million in the first quarter of 2020 for the substantial increase was driven by improved commodity markets as well as actions we've taken to optimize our operations.
Mark: First quarter 2000, and twenty-five hog production segment sales of $932 million increased by 32% year over year, Despite a 21% or 800000 had decrease in the number of hogs produced.
Mark: Q1 sales increase was primarily due to the following factors.
Mark: First as we transitioned internally produced hogs to external operators, we recognized approximately 155 million for the sale of commercial hog inventories.
Mark: Second our average market hog sales price increased primarily due to a 14% year over year increase in the CME lean Hog index and finally, we increased external grain and feed sales by $73 million, primarily due to our new external operators.
Mark: Taking a look at our other segment, which includes our Mexico and Bioscience operations. It outperformed the prior year by $23 million posting an operating profit of $14 million in the first quarter of 2025. This was led by strong performance in Mexico. Our corporate expenses also came in $3 million below the prior year.
Mark: As we look for ways to lower our cost basis throughout our organization, including SG&A.
Mark: Turning now to our strong balance sheet and financial position.
Mark: Ended the first quarter, our net debt to adjusted EBITDA ratio was 0.7 times well below our policy of less than two times, our liquidity at quarter end was $3 $2 billion, including $928 million in cash and cash equivalents. This is well above our policy threshold of $1 billion. Despite this first quarter.
Mark: Historically being a high working capital period.
Mark: The first quarter of 2025, we used $166 million of net cash flows and operating activities versus $219 million last year.
Mark: Capital expenditures in the quarter were $79 million compared to $92 million in the first quarter of 2020 for more than 50% of our planned Capex investments. This year are to fund projects that will drive both top and bottom line growth.
Mark: Consists primarily of various plant expansion automation and improvement projects as we continue to lower our manufacturing cost structure and better utilize labor.
Mark: On April 22nd of this year, we paid a quarterly dividend of 25 cents per share reinforcing our commitment to return value to shareholders and we expect to pay a dollar per share in annual dividends. This year subject to the board's discretion.
Speaker Change: Now turning to our outlook for fiscal 2025, which we reaffirmed this morning in the face of a dynamic consumer spending and tariff environment. We expect to continue to grow profitability by executing our core strategies that Shane reviewed.
Speaker Change: First we anticipate that total company sales to increase in the low to mid single digit percent range compared to fiscal 2024 are.
Speaker Change: Our outlook for segment adjusted operating profit is as follows for our packaged meat segment, we anticipate adjusted operating profit in the range of 1.05 billion to 1.15 billion for fresh pork, we anticipate adjusted operating profit of between $150 million to $250 million.
Speaker Change: As Shane mentioned, we continued to execute our best sales strategy in response to recent tariff actions and we believe our 2025 range for fresh pork addresses tariff risk.
Speaker Change: For Hog production, we anticipate adjusted operating profit to range between a loss of $50 million to a profit of $50 million and we anticipate total company adjusted operating profit in the range of $1 1 billion to $1 3 billion. Our total company operating profit outlook reflects continued efforts.
Speaker Change: To more than offset inflation through cost savings and efficiency initiatives we.
Speaker Change: We anticipate capital expenditures of between 400 and $500 million for fiscal 2025, and finally, we anticipate an effective tax rate of between 23 and 25% for fiscal 2025.
Speaker Change: In summary today, we reaffirmed our outlook for 2025 based on solid Q1 results and our continued expectation that we can generate operating profit growth, even as we navigate a challenging consumer spending and tariff environment now I'll ask the operator to open up the call for Q&A operator.
Speaker Change: Thank you well now begin the question and answer session.
Speaker Change: To ask a question you May press Star then one on your telephone keypad.
Speaker Change: Who was running a question. Please press Star then two.
Speaker Change: We'll pause for just a moment to assemble our roster.
Speaker Change: And today's first question comes from making pop with Morgan Stanley. Please go ahead.
Speaker Change: Hey, good morning, Shannon Mark Thanks, so much.
Speaker Change: If we could just start maybe with with terrorists. Obviously, a very dynamic situation. You said the guide addresses terror, France wondering if you could just expand on that or are you including.
Speaker Change: The 145%, China tariff rate as it stands today and what exactly does that mean in terms of how you're thinking about your own export demand I I ask because some of the third party data we've seen would suggest some pretty meaningful reductions in exports to China recently, so just wondered if you could provide a little.
Speaker Change: More detail on maybe what you're seeing specifically, if that's different than the industry and what's included in your outlook. Thank you.
Speaker Change: Yeah.
Speaker Change: Yeah. Thanks, Meghan so.
Speaker Change: As it relates to China from an industry standpoint, we can't underestimate the importance of China has been too.
Speaker Change: For the overall industry.
Speaker Change: Last year 'twenty 'twenty four China was responsible for about a billion a little over $1 billion of of.
Speaker Change: <unk> sales coming out of the U S and that help keep the overall revenue profile up in <unk>.
Speaker Change: Prices and meet with.
Speaker Change: With China, no longer essentially being available we've really had to pivot our business and Donovan I'll, let you talk to this but it's it's a well we've built over the last few years is really a lot of different levers in fresh pork that we can pull so we're able to do.
Speaker Change: To ebb and flow with different markets.
Speaker Change: For Us China represents in total about 3% of our revenue.
Speaker Change: And so oh.
Speaker Change: While it's important and we do believe we have other options and other again levers we can pull through the channels that we discussed a little bit earlier.
Donovan: So Donovan you won't talk to specifics about what we've been no.
Donovan: Yeah. Thanks, Shane I appreciate it and thanks, Megan for the question.
Donovan: We understand how important the tariff topic is and I think we alluded to this in our last call, but it's in the narrative that was talked to by Mark and Shane earlier, we kind of put this in perspective, we believe we believe we're better positioned than others to navigate due to our team we've been through this before it's nothing new to us.
Donovan: We fully expected this tariff interruption as we came into 2025, so first and foremost it was alluded to but specifically as what Shane mentioned are our best customer and we're going to focus on packaged meats and we're going to focus on our fresh pork segment first in domestic fresh sports side, but I'll I'll say in our higher value.
Donovan: Our fresh pork items, so we understand and we've talked a lot about China. It seems to be a continuing topic, but we got 30 other export markets. We felt it so and we're utilizing our next best stay home strategy that we continue to talk about here. So, albeit that you know this is China at 104.
Donovan: 5% is not a viable sales market for us at that at the moment.
Donovan: We do believe and we hope that things will continue to work in progress to a settlement there, but if it does not we got a strategy to mitigate into improve our sales into use our next best sales strategy to pretty much mitigate.
Donovan: As much as we can from that from the from the China aspect and we got to remember too that we're one component in this and we are a large component, but everybody faces the same China struggles that we do so and most importantly, I want to say that we've got this fully integrated into our 2025 operating profit outlook. So.
Donovan: We feel comfortable about our profitability range and we also feel pretty good about where we sit with alternative markets as it respects to the products that are currently going to China.
Speaker Change: Thanks, that's really helpful. A lot of detail there may be a follow up somewhat related.
Speaker Change: Just on Hog production, maybe you can talk about your current view I guess two part question part a year.
Speaker Change: Current view on industry Hog supply and demand as we think about the remainder of 'twenty five and whether that's you know how the tariff environment impacting our outlook relative to a month ago and as it relates to your own hog production outlook.
Speaker Change: You had some strong performance in <unk> and the curve would continue to suggest that profitability should remain pretty strong into Q3, Q I'm. So any updated views there as it relates to the tariff environment and how that's impacting your own hog production assumptions would be helpful.
Speaker Change: Yeah, where we've seen the impact from tariffs as it relates specifically to halt production was really on the revenue side from southern the in the immediate 10 days. Following the announcement of the tariffs we saw a tremendous amount of volatility and hog production from again from the revenue side.
Speaker Change: That has since rebounded we've seen that come back, but it did add it at one point the industry. It's staying about 12 dollar hedge swing just from the revenue standpoint, you as it relates to the input cost.
Speaker Change: The hogs that we raised here, we see corn and soybean meal, that's grown here and those hubs are sold here in the U S. So not a big impact on the raising cost side, just more related to again to the potential impacts on the revenue side now we've seen meat remained strong and that's helped elevate hog prices back up.
Speaker Change: Back up to more normalized levels and we did have as you mentioned, a really nice Q1, and hog production. The futures curve does indicate that Q2 and Q3 will remain strong.
Speaker Change: And then in Q4, what we see is that normal return to seasonality.
Speaker Change: From an overall supply demand balance standpoint.
Speaker Change: I think my personal opinion is we're in a balanced situation now.
Speaker Change: Not hearing anything about any expansion going on.
Speaker Change: However that could change as profitability moves back into hog production in a more normalized cycles return, but where we're what we're hearing today and what we're seeing is a pretty pretty balanced industry at this point.
Speaker Change: Great. Thanks, Dan.
Speaker Change: Thank you and our next question today comes from Ben Theurer with Barclays. Please go ahead.
Ben Theurer: Hi, Good morning, Jean Marc Congrats on the good result for one Q2 quick ones. So first when we look at the results for the first quarter and I don't know.
Ben Theurer: Spoke about four weeks ago on your fourth quarter results and back then it felt like you were a little bit more cautious on the one on the first quarter. So just wanted to understand if you could maybe break down what.
Ben Theurer: What your initial expectations were for <unk> and how it ultimately turned out in the first quarter, where we're be upside surprises within the different segments that would that would be my first question and then I have a quick follow up thank you.
Ben Theurer: Yes, benchmark, putting them back to the.
Ben Theurer: Or to the year end call really the the caution was around the later Easter holiday as.
Ben Theurer: As we saw it coming into the first quarter, so with Easter three weeks later this.
Ben Theurer: This year some of that volumes pushed into the second quarter. Additionally.
Ben Theurer: With the higher raw material input costs, primarily bellies, and trimming as being up 15% and 30% respectively year over year.
Ben Theurer: Now in time for our Formula pricing to catch up and then just a cautious outlook from the consumers in general trading down across the portfolio, but really that plays to our strength, where we have.
Ben Theurer: Our solution as we've discussed to meet that consumer wherever they are in there and their budgetary constraints with the quality branded or private label products. So just a little bit of a trade down in the consumer environment was leading up to the caution in the first quarter.
Ben Theurer: Okay got it and then secondly, just coming back maybe to the to the packaged meats business, which obviously you flagged it in your prepared remarks, but wanted to dig a little bit deeper into some of the initiatives you're doing on the lunch meat side.
Ben Theurer: Where do you see the largest opportunities.
Ben Theurer: What portion maybe of Capex or of a focus of growth investments are you planning for the next couple of years to really drive that position of yours up in the packaged much me, which seems a great opportunity.
Ben Theurer: To further growth the packaged meats business.
Speaker Change: Yeah, Matt I'll take the capital question, and then I'll throw it over to Steve to talk a little bit more of a strategy, but but again as we said you know what the expectation is to spend between 400 $500 million annually on Capex and about half of those half of that spend is on return on investment type projects, so adding capacity and high margin.
Speaker Change: <unk>, expanding our capabilities and really about improving our cost structure as well, whether it's through automation or repurposing labor against higher.
Speaker Change: Yielding positions within the facilities and the.
Speaker Change: Another half is going to be basically on maintenance repairs and maintenance types spend but I would say that the the SKU. The spending again from a segment basis will be more heavily weighted to the packaged meats and fresh pork segment.
Speaker Change: The capital moving forward, so I'll turn it to Steve to talk a little bit more about the strategies sure. So I. Appreciate the question. So when you think about the.
Speaker Change: I guess, a couple of ways to answer that so when you think about the lunch meat category. So one way, we think about the launch or the lunch day part and when you think about the lunch day part the key thing about that is we've been making gains in this space really due to the targeted approach that we have to consumers and also from an innovation standpoint, so when we think of.
Speaker Change: The lunch day part, we actually break that down into three categories. So we've talked about the bulk deli lunch meat as a category. We also talked about packaged lunch meat and then portable meals and the thing about all three of those categories. When you look at the results in Q1 is that all three of those categories. We grew share and then it does.
Speaker Change: And to that the <unk> was up a total of four points in Q1.
Speaker Change: So when you think specifically about one of the categories that we've talked about in the past with prime fresh and fresh sliced deli under prime fresh side that is the fastest growing brand within that space. So when you look at Q1 were up.
Speaker Change: <unk> seven points for package lunch meat on the branded side and again that outpaced everybody else in the category are likewise, we also saw gains in share in the bulk deli meat. So as Mark mentioned it is a big focus for US we continue to see some big wins not only from distribution gains, but also consumer acceptance.
Speaker Change: And velocity that we continue to see increasing within this specific space. So it's a big category for us and it's a big focus that we continue to see a lot of opportunity as we go through this year.
Steve France: Got it thanks, Steve.
Speaker Change: Thank you and our next question today comes from Leo Jordan of Goldman Sachs. Please go ahead.
Leo Jordan: Good morning, and thank you for taking my question I just wanted to stick with package meets a little bit scene. If you could provide more detail on how the volumes trended by month throughout the quarter. Just so we can isolate the impact of Easter and just how are you thinking about the balance of volume and price in that segment as we go throughout the year.
Leo Jordan: Sure No I appreciate the question so.
Leo Jordan: I'll talk about it a couple of weeks. So when you think about the packaged meat side, we're going to break it down into really the retail side of the business in the foodservice side of the business. So when you think specifically about Q1 in the retail side as Mark and change it already mentioned I would say theres a few different factors that impacted the results in Q1, So first off we have.
Leo Jordan: The shift in the volume shifts that we have between Q1 and Q2 because of Easter with Easter occurring three weeks later, obviously, a sizable piece of our business is seasonal hams. So we see that volume shift from Q1 into Q2. In addition to that we also saw higher raw material input costs versus last year.
Leo Jordan: <unk> already mentioned bellies were up 15% free them up 30% and we also have the fifties up about 19%. So all of those have an impact on our overall profit margin percent and then finally, we are starting to see some consumers trade down to less expensive alternatives. So.
Leo Jordan: Quickly address each of those so when you think about the Easter volume shifts that you're asking about the reality is we see that volume coming through into Q2 and.
Speaker Change: And the reality is when we look at where we're going to be for the year. We still expect as Shane had mentioned to be up about 1% in total volume for the year. So we do see that volume coming back the way, we expect it from an Easter standpoint.
Leo Jordan: When you think about.
Leo Jordan: The pricing and the raw material markets that we were dealt with so although timing varies by category and product line, our formula pricing private label will help mitigate some of those high higher raw material costs that we saw in Q1.
Leo Jordan: And also we are seeing slightly although they've come down we're still seeing slightly higher markets in Q2 versus where we were a year ago and then the other one is the key the key point is when you start to see that a consumer shift that's taking place to me that really highlights the benefits of our strong brand portfolio. So we can we can really.
Leo Jordan: Help mitigate some of these factors that we typically consider uncontrollable are really staying focused on our current strategies. So our diverse brand portfolio that we have it's really provides us the ability to market our products to customers and consumers across multiple categories and price points. So as those consumers start to shift.
Leo Jordan: And that you're hearing a lot about so if they decided to shift down and they are buying your premium product, they're going to shift from a premium product and the mid tier and mid tier down too.
Leo Jordan: We're opening price point, if that consumer does decide to trade out of brands and enterprise a label, we have a good opportunity to capture that sale at that point because of the breadth and depth of private label that we produce for a lot of our retail partners. So so all those things combined really had an impact in Q1, but I would say that.
Leo Jordan: The strategy that we have in place and staying focused on really the portfolio that we have and the way we can cover that pricing spectrum mix optimization that you've heard us talk about and how we continue to shift that mix to higher margin products and not be tied to so much a commodity product, which is really should certainly be an impact.
Leo Jordan: Because of the higher raw material costs. The innovation that we continue to bring to the market and initiated market. Both mentioned the operational efficiencies, which was a big focus that we have so all those things combined the reality is we're sticking with the guidance that market already mentioned on packaged meats. When we look at the remainder of 2025.
Speaker Change: Thank you that's all really helpful color I'm, just kind of in a related follow up.
Speaker Change: Speaking about the consumer trading down I know you have a range of price points across Europe.
Speaker Change: <unk>.
Speaker Change: What are you seeing in the competitive environment within packaged meat, maybe how did promotional activity track versus your expectations in the quarter and just how are you thinking about the promotional environment as we go through the year.
Speaker Change: Yeah, So I would say that from a promotional standpoint from a competitive set it's nothing new.
Speaker Change: So.
Speaker Change: It's always going to vary depending on what their specific strategy is at the time, so whether somebody decides to try and grab share short term through increased promotional promotions to drive it.
Speaker Change: In trade to drive some volume.
Speaker Change: Reality is.
Speaker Change: We've always dealt with that so we're very consistent with how we drive our overall business.
Speaker Change: And the way we look at this business is it would be very easy to grab share short term by increasing our trade or promotional strategy, but the reality is that that's really not the right way the right way to really manage that business because it's short term and if you've got a game and a price you're probably going to lose it on price. So when we look at opportunities to.
Speaker Change: Grow our business, we're focused on the long term so how do we gain that consumer acceptance and drive consistent volume and repeat purchases with that consumer versus just trying to drive a one time purchase by having a low price point out there.
Speaker Change: Great. Thank you.
Thomas Palmer: Thank you and our next question comes from Thomas Palmer with Citi. Please go ahead.
Thomas Palmer: Good morning, and thanks for the question.
Thomas Palmer: I wanted to I guess first just ask on the hog production outlook.
Thomas Palmer: First quarter was fractionally profitable in a seasonally weak quarter and then your messaging when answering one of <unk> questions about <unk> and three Q seemed pretty positive. So I guess was there.
Thomas Palmer: At least the contemplation in terms of boosting the hog production outlook or at least raising the low end of the outlook because it does seem like the next couple of quarters should it should be positive at least.
Thomas Palmer: Okay.
Thomas Palmer: Yes, Tom we do again see two Q second quarter and third quarter again looking at the futures curve. They do look to be strong.
Thomas Palmer: Looking at the fourth quarter.
Thomas Palmer: Right now it looks like normal seasonal losses will occur, but we are a little bit cautious.
Thomas Palmer: We saw the impact of the tariff announcements.
Thomas Palmer: That did to the revenue side of the business and we believe we've appropriately priced that in when you look at our hour.
Thomas Palmer: Our forecast for the year and hog production.
Speaker Change: Okay. Thanks, Thanks for that.
Speaker Change: And then I just had a follow up on the second quarter.
Speaker Change: You'd noted some of the discrete headwinds that maybe are a little more isolated to two <unk>.
Speaker Change: In terms of Easter and some of the raw material factors I guess as we're thinking about packaged meats, especially any help on kind of how you're thinking about the flow through of profitability. I mean, I would assume sequential improvement is expected in the second quarter, but any help I guess as we're thinking about last year in <unk>.
Speaker Change: Puts and takes.
Speaker Change: Tom you're you're cutting in and out in the question.
Speaker Change: I didn't get it so could you repeat the question again please.
Speaker Change: Yeah, sorry about that.
Speaker Change: Yeah, just on the packaged meats segment.
Speaker Change: You noted some of the puts and takes.
Speaker Change: It sounds like.
Speaker Change: That weighed on <unk>, maybe and then become a benefit in the second quarter. So it did seem like the message was sequential improvement wondering how that might compare on a year over year basis.
For profitability and packaged meats.
Speaker Change: Yes, again I think.
Speaker Change: That cautious consumer that we mentioned and trade downs across.
The pricing portfolio could could.
Speaker Change: Compressed margins.
Steve France: Year over year, certainly and again as Steve indicated while costs have come down raw material costs have come down from the first quarter. They are still inflated versus the second quarter of last year, So with our formula pricing. It does take a little bit of time to catch up.
Steve France: So I would say there'll be a little bit of margin compression as we as we move into the second quarter as compared to last year.
Steve France: Next to that.
Speaker Change: Thank you and our next question comes from the husband as long as he with Bank of America. Please go ahead.
Speaker Change: Guys. Thank you so much for the question. So I just had a similar question.
Speaker Change: Tom asked but on fresh pork instead, so quarter to date, we've been seeing some continued compression and widespread and fresh pork processing. So how should we think about that impacting to keep profits for fresh park.
Speaker Change: Yeah, So I'll start and turn it over to Don dominant but seasonally the second and third quarter, you do see compression in that market spread overall.
Speaker Change: Higher hog prices as we have discussed.
Speaker Change: But <unk> and the team have done a great job of reducing and improving the cost structure overall, so that we're in.
Speaker Change: Not necessarily is bound by the industry market spread as we have been in the past. Additionally by looking to sell up the value added side of our portfolio whether its case route of your marinated driving incremental sales margins, but you will continue to see that that seasonal compression in the market spread which which will impact.
Speaker Change: <unk> profitability overall.
Mark: Yeah, Mark a.
Mark: Totally agree with that assessment I mean, we're going to go through that seasonal compression, it's not unexpected so but but.
Mark: But what I'd like to talk about is is the focus of our strategy is more related.
Mark: Then on our significant efficiency gains through automation improvements Shane talked about it earlier I think it's been a common theme here, we are really attacking our cost structure on fresh pork and that's going to continue and that only helps this unknown aspect of compression in the market spreads.
Mark: We know we're going to go through it we don't know how wide it will be above.
Mark: But but we look we're very optimistic about how our cost structure compares to that so I just wanted to give you. Some solace in that our market outlook looks looks very favorable market market already addressed that we've got this factored into our outlook and profitability and fresh board and we've got bandwidth when it comes to these these.
Mark: Efficiency gains I'm talking about we're very excited about that and hope to talk more about it and in our future calls.
Mark: The only other thing I would add as it relates to fresh pork and we talked about this in the context of packaged meat is the timing of Easter.
Mark: With it being three weeks later in fresh pork, we have seen a delay in some of that traditional promotional activity that would take place for fresh pork. So.
Mark: So we expect what we typically would see in April push a little further into May and June from a promotional standpoint.
Mark: Okay, great. Thank you so much guys.
Speaker Change: Thank you we have time for one more question there and our final question comes from Heather Jones with Heather Jones Research. Please go ahead.
Heather Jones: Good morning, Thanks for the question.
Heather Jones: I wanted to start on the hog production side and on the genetics piece.
Heather Jones: I was just wondering if it's a two part question.
Heather Jones: First wondering if you could.
Heather Jones: Just qualitatively qualitatively give us a sense of how much of those benefits have you already realized versus how much is still on the comm and.
Heather Jones: And then I would.
Heather Jones: Presumably the benefits are related to solid productivity, but I was just wondering if there any offsets that we need to be aware of with that with that genetics change.
Heather Jones: Yes, so from a genetic standpoint, we are.
Heather Jones: In the last the last time frame set in the last six months of having the new genetics across our commercial herds. So this has been about a five year project together.
Heather Jones: So we're in the the last phases of that.
Heather Jones: We are beginning to see.
Heather Jones: The impacts of that manifest in our financial statements. You know you know with the grow out Sokolova Hog. It's 10 months from the time that new genetics IL has a market that is ready to come to the market. We are beginning to see that and Youre correct. Most of that is on the sales productivity side.
Heather Jones: Saying things like R. P M S y <unk>.
Heather Jones: Really expand exponentially, which is helping our overall cost structure.
Heather Jones: So the south productivity is a big piece of that.
Heather Jones: From a tradeoff standpoint, as you know there there's always tradeoffs and one of the things we've learned in this generic new genetic is it is a little more.
Heather Jones: It is a little more difficult from a health perspective, and so we do see a little bit of trade off in health across our hurts.
Heather Jones: But again, we've implemented a number of practices to include to improve the health status of our herd.
Heather Jones: It's something we feel like we can overcome so I would tell you where we're almost done and we really expect to really begin seeing the full impact of that as we continue to move through 2025 and definitely in 2026.
Speaker Change: Thank you for that and then just talking about industry health and all I mean numbers.
Heather Jones: Process volumes have just cigna.
Heather Jones: Significantly lagged expectations early part of this year and my understanding a lot of it's based on.
Heather Jones: As industry challenges with disease and all I was just wondering what your thoughts are on that as far as how quickly that'll be resolved and.
Heather Jones: Or do you expect that to be a challenge for the industry for March of 'twenty five.
Heather Jones: Yeah, we are coming out of coming out of the winter months, we are hearing more as it relates to disease across the industry. I think you can see some of that in the.
Heather Jones: In the futures market.
Heather Jones: How people feel about disease across the industry.
Heather Jones: For us we have seen dependent on the region. Some slightly elevated cases, but I don't think to the to the level that did some in the industry are facing so I do think it's going to be an issue for the industry as we kind of continue to move through 2025 and.
Heather Jones: And we will see as we get out into the later parts of this year, the second half and really into the fourth quarter.
Heather Jones: If we have any holes come in on a process.
Heather Jones: I mean, the only thing I'll add is I agree with everything changed just mentioned, we do see I mean, the numbers are tighter I think that's a that's the fact and I think our summertime period, I think we'll see tighter numbers.
Heather Jones: You can see that currently in the cash market for that for hogs, right now, but but all in all it.
Heather Jones: That's something else, we we expected I think the industry expected and I think we're balanced I think as.
Heather Jones: As far as pork is concerned we look at it we see or expect it pretty balanced model throughout the summer and the rest 2025.
Speaker Change: Wonderful. Thank you so much I appreciate it.
Speaker Change: Thank you. This concludes the question and answer session I would like to turn the conference back over to President and CEO Smith for closing remarks.
Speaker Change: Well, thanks to everyone for joining our call today.
Speaker Change: As we mentioned we are off to a great start in 2025, we do have a seasoned team that is prepared to navigate a really dynamic macroeconomic environment and we believe again, we're well positioned to deliver long term growth and increase value for our shareholders and we look forward to updating you on our progress.
Speaker Change: Following Q2 results.
Speaker Change: Thank you. The conference has now concluded and we thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.
Speaker Change: Sure.
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