Smithfield Foods, Inc. (SFD) Earnings Call Transcript & Summary

Good afternoon, everyone. Let me just start with a quick disclaimer. For important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. Any questions, you can reach out to your Morgan Stanley sales rep. So again, good afternoon. Thanks, everyone, for joining the Morgan Stanley 2025 Global Consumer & Retail Conference. I'm Megan Clapp. I'm the U.S. food analyst here at Morgan Stanley. I'm really pleased to be here today with Smithfield Foods and the company's CEO, Shane Smith. So Shane, thank you so much for joining.

Thanks for having me.

Smithfield is one of the world's largest vertically integrated pork producers and processors, major supplier of fresh and packaged meat products in the U.S. and globally. But that's just a high-level start. So Shane, maybe for those who might be newer to the Smithfield story in the room, can you start with an overview of the business today, your scale across the various segments and how the One Smithfield operating model has helped drive the performance you've delivered in this first year back in the public market?

Yes. So for those of you who don't know Smithfield Foods, we were founded in 1936 in Smithfield, Virginia. So we've been in business for almost 90 years now. From about 1936 to about 1980, I think you could classify us as a small regional player. And at that time, that's how all of the industry was set up. Beginning in about 1980, and continuing through the early 2000s, we became very acquisitive. The industry was consolidating. We bought a number of companies. And when we came out of this period, probably about the year 2000, 2001, we were the largest vertically integrated pork producer in the United States. And that -- so what we have done over these last 20 years is now really about integrating all of those acquisitions. And so if you look at our packaged meats business today, and when we bought -- when we went through this period, a lot of what we bought was fresh pork assets, but we also bought a lot of branded assets to go along with it so that we could utilize more of our own raw material internally. So as we kind of sit today, we are on a packaged meats business basis. We do roughly 3 billion pounds of packaged meats annually across 25 different categories, primarily here in the U.S. About 80% of that volume is pork-based. So you can think hams and bacon and that type of product. But we also have some protein diversification in this part of our business, where today, we're about 20% a combination of beef and poultry. So if you think Nathan's hot dogs, for example, that's part of our beef, deli meat and items like that, we'll have some poultry products to go along with it. So we do see some vertical integration or some protein diversification. In our portfolio today, we really support about 14 different brands across the U.S. We have a combination of national brands, which is about roughly 52% of our sales. We have some regional brands. So think things like Farmer John out on the West Coast or Farmland or John Morrell in the Midwest. And we kept those regional because what we found is those brands still have a lot of pricing power in their local environment. And then finally, we have some value brands and some specialty brands. So altogether, really supporting about 14 different brands across the U.S. And that's significant because that is down from what was probably about 6 or 7 years ago, we were supporting upwards of 40 different brands across the U.S. So we took a really deep look at our brand strategy, our geography strategy and how -- what brands we wanted to support across the U.S. And so we're down from about 40 brands in our portfolio down to about 14. Now in the fresh pork side of the business, that's the 7 facilities we have across the U.S. that harvest the hogs that either we produce on our own farms or through contract growers or hogs that we buy from independent hog producers in the U.S. On an annual basis, we'll harvest about 30 million hogs. We've really been focused on a number of things in fresh pork these last few years, and that's really been around our cost structures. So as you can imagine, if you want to operate on what tends to be a little bit heavier commodity related, you have to have an excellent cost structure. So we've invested in automation and technology, in capacity expansion, a number of things to get our cost structures down to where we see today, which is, I believe, among the best-in-class across the industry. We've also built in what we call flexibility. 1.5 years ago, we harvested about 33 million hogs per year. We took about 10% out, and that allowed -- that really gave us the flexibility to decide, for example, were we going to run weekends, were we going to run nights. And really taking that 10% out, what we found was that last 10% were typically our worst sales. And so by taking that 10% out, we improved that other 90%. So a lot of work around our fresh pork business. We have access to about 40 different export markets around the world. 30 of those were active in any given day, we'll be accessing about 30 of those markets. So really a robust system that we've built there. And then the very beginning of our supply chain is our hog production operations. And so out of that 30 million hogs that we harvest, today, we're raising about 11 million of those. So we're roughly about 32%, 33% vertically integrated. And that's really a function of where those 7 plants are located geographically across the country. So for example, our largest plant in North Carolina will be upwards of 80% vertically integrated and our second largest plant in Sioux Falls, South Dakota would be less than 1%. So it's really a function of the availability of independent hogs surrounding our business. At our high point, we were at about 17.5 million. We began a journey about 2 years ago of really rightsizing that level of vertical integration, realizing that we didn't need to be 50% vertically integrated to continue to support our fresh pork and our packaged meats business. So today, we'll finish about 11 million, 11.5 million. We have a goal to be down to about 10 million. We think that will occur over the, I would say, the next 2 to 3 years. But what we have done with those remaining 10 million to 11 million hogs is we've completely changed our genetic structure, which has drastically improved our cost structure. We've invested in our health, the overall herd health of our hogs. I would tell you that 3 years ago, 4 years ago, we probably had less than 1% of our herd, was considered high health. Today, that number is in excess of 50%. So health has played a big key. And then in feed and nutrition, when you raise an animal, about 55% of that cost is from grain being corn and soybean meal. So a lot of focus on that as well. So today, the 3 segments are really working well together, and that's what we've seen, and that's the way the vertically integrated model should work. And if you looked at our third quarter earnings, what you would have seen is it was a record year for us from a net income perspective, but there was not a record year for any of the 3 individual segments. So that means the system is now working the way it should, where when we see pressure on raw material or on hog cost, we see that profit migration, but ultimately, we keep it in our portfolio and in our net income. You mentioned One Smithfield. So I'll go back just a little bit to talk about this acquisitive period that I talked through. The philosophy was when you bought a company, you allowed competition, okay? So what happened, what actually the result of that was, was in many cases, our 3 primary Smithfield companies, which was Smithfield Packing, Farmland Foods and John Morrell were actually competing against each other for the same business. And in most cases, we were the only 3 competitors in the room. And so we began this journey of what we call One Smithfield of -- it simply began to start with a -- bringing together the sales forces. So we had at our height, we had about -- I think it was 4 sales forces across the U.S. Again, we had multiple brands. We had 4 ERP systems. We had redundancy in our distribution networks. So we never unlocked the synergies that existed through those acquisitions. And so that's something we've really been focused on is bringing it together to the Smithfield we are today, which is one ERP system, one sales force, one cohesive national brand strategy and the way we go to market. And so it's really changed the complexion of who we are and the overall earnings profile that we have as a company.

Great. Great overview. Thank you. Definitely a lot to unpack here...

That was a lot. I tried to cram 90 years of history into about 4 minutes.

You did a great job. Maybe we could just start with demand. This is a consumer conference. There's been a lot of discussion around consumer demand. Pork is a category that's benefited from this protein craze, if you will. The low-end consumer, there's been a lot of discussion around pressure on that segment. So as you look across retail, foodservice, exports, your main kind of demand drivers, how would you describe demand for pork and Smithfield pork overall? And how are you thinking about that evolving into 2025?

Yes. Demand for protein has remained strong in spite of some of the inflationary pressures, in spite of some of the consumer pressures that we see and we do see a consumer in 2025 that is under a tremendous amount of pressure. But I think that plays into one of our key strategies as a company in our strategy to be present with that consumer wherever they are. And so what I mean by that is we operate across 25 different categories of packaged meats. And again, those 14 brands represent different price points along that spectrum. And so we have packaged lunch meats is an example. That's about, as an industry, roughly a $6.2 billion, $6.3 billion category, where many or nearly all of our competitors play at one price point. They play at a premium price point, they play at a value price point or they may have something in the middle, but they typically don't have all 3. The way we've positioned our portfolio is Smithfield Prime Fresh, which may sell for $9.5 to $10 at retail, all the way down to Gwaltney, which would sell at $2.50 at retail and price points all along the spectrum. So what that means is we don't have to discount or heavily promote our top-tier brands. We can allow natural substitution to take place through that category. And if that consumer decides to move out of branded altogether, about 40% of our business at retail is made up of private label. And so the relationships that we've established with our customers has really allowed us to, in many cases, become category captains. And so working well with that customer by allowing that consumer to move in and out, whether that's up and down the branded spectrum or into the private label spectrum, we're still keeping that customer, that consumer in our portfolio. And that's been really successful for us. That's why you haven't seen big changes in overall volumes, the work that we've done behind the scenes in private label to improve the margin profile. People used to think that you couldn't make money in private label. We've kind of turned that stereotype on its head. And one thing we've also been able to do is do formula-based pricing. So as the underlying commodity moves, the margin profile can move along with it, which has added some consistency in our earnings as well. So we don't see those big swings in our packaged meats business the way that maybe we did 5 or 6 or 7 years ago. So again, the consumer, I expect to stay under pressure. And it's really a high-income consumers are still -- you're still seeing them buy that top-tier product. And the way we're positioned allows all consumers to move wherever they happen to be in their purchasing power at that time.

Great. It's more of a macro issue that hasn't impacted your ability to deliver.

No. People are still looking for protein to your initial point. And where pork right now is positioned against specifically beef. Beef is still extremely high. And so one of the things people are seeing with pork specifically is the versatility of it. Pork is the only protein that is really present at every daypart. So you can have it for breakfast, lunch, dinner, snacking. And there's a tremendous amount of versatility, whether that's in the flavor profile, the presentation profile. And so we've been able to do a lot with it, and we're still seeing consumers picking up protein.

On SNAP specifically, there was a lapse in SNAP payments. I think when you reported 3Q, you talked about -- I don't want to put words in your mouth, maybe some prudence in the fourth quarter guide in packaged meats just around the potential and what that we didn't really know what was going to happen with SNAP payments. So now as you look back into November, any discernible impact you saw in your retail business as SNAP payments were lapsed?

No. And keep in mind, that period of time lasted for about 10 days. So there's not a tremendous amount of trend data that is out there where you can see the actual impact of SNAP. The other thing I would tell you, if you look at the 25 categories that we operate in, only about 7.2%, 7.3% of total SNAP dollars were spent in those categories. And so I think what we'll see as more of the data comes out over the next few weeks is probably some pullback in snack spending, cookies, crackers, sugary drinks, that type of thing because, again, there was still this drive for protein even at that level. So we didn't see a material impact. And again, I think this is -- this was more of a onetime thing than something that's going to continue to happen year after year. But again, over a course of 10 days, there just wasn't -- there's not enough data to call anything a trend.

Got it. That's helpful. Maybe just turning to supply. Price -- the hog prices have eased a bit since you last reported. They've come back a little bit more recently, but they've certainly been volatile. From your standpoint, where do you think we are in the hog cycle today? What's your kind of outlook for hog prices over the next 6 months or so?

Yes. The hog cycle is interesting. You used to -- the people would think a hog cycle would last a period of about 5 years, right? I think that's changed. I think today, the industry is in balance. In 2018 and '19, we saw the equivalent of about 50,000 head of shackle space come online on a daily basis, which really put a lot of pressure on the hog complex. But since that time, we've seen that same amount of shackle space leave the industry, including with us as we close some of our higher cost facilities. And so where I sit today, I think the industry, the pork industry between the hog producers and the amount of shackle space is pretty well balanced. We don't hear a lot of expansion taking place in the industry, a lot of material expansion taking place. We do think that, especially if you look year-over-year back to 2026 over 2025, I think we may see some productivity gains. So I think any additional head that we see will be from better disease control or productivity. But I don't see a rush to expansion at any material amount taking place across the industry. So it feels pretty well balanced.

Maybe stable prices, give or take.

I think so.

As you translate that to the cutout in your packaged meats business and the raw material side of things, what is -- how are you thinking about that for the raw material side? It's been a bit of a pressure point this year just as prices have continued to climb. So as we look to 2026, has the setup improved in your mind as you think about the profitability and the margin on that packaged meats business?

Yes. One of the things that drove hog prices up in 2025 was really about disease risk in the Midwest that we saw really start coming to fruition back in the fourth quarter of 2024. It doesn't feel like we're going to have that same issue. So when I look at 2026, I think hog prices are going to be more moderated. I think that's going to mean the cutout will be a little bit lower. And I think raw material input costs for our packaged meats business, so I think specifically bellies and hams and trim, I think they're going to be more moderated as well. I think we'll see -- overall, I think we'll see an improving complex next year.

Okay. And let's talk a little bit more about packaged meats, core driver of your business. You've said consistently since you came back to the public markets earlier this year that the strategy in that segment is to grow profit is mix, innovation and volume growth. This year, we've seen a lot of positive tailwinds from mix and innovation, a bit more pricing just given what the cutout has done. As you look ahead in packaged meats and those kind of drivers, how are you thinking about the ability to continue to grow profit? And what are the...

One of the biggest changes for us as a company has been our approach to our product mix. For those of you who have followed us for a while, you had noted a lot of our offerings even compared to 5 years ago, where a lot of it was kind of legacy heritage. So you can think things like our holiday ham, which was a low-margin category or a low-margin product compared to what we can do with that product today. And so instead of selling that product as a holiday ham, now we're looking at how we change that mix and create instead of one 15-pound product, 15 one-pound everyday use products that have a margin profile that's 5 to 6x different. Dry sausage is another great example. That's a category that's expected to grow between 5% and 6% through 2030. We actually did an acquisition of Cargill facility in Nashville, Tennessee about 1.5 years to 2 years ago that added 50 million pounds of dry sausage capacity to our business. We continue to spend roughly half of our capital each year's spent in automation, technology and capacity to continue to improve the overall cost structures. In the 25 categories that we operate in, 10 of those categories are over $1 billion of revenue opportunity each. In, I think, 6 of those categories, we have a #1 or #2 position. But in 4 of those categories, we're #5, #6 or #7. So that's where we really see an opportunity to really drive business in those categories like the packaged lunch meat category. That's $6.3 billion revenue category, we're #5 in with about an 8% market share. So that's something through our Prime Fresh lines. We've really been focused on taking market share there. But those other 6 also that we're already #1 or #2 in, we're not done growing there either. So we still see opportunity for geographic distribution where we can get into different areas and also more SKUs and spots on the shelf. And this is one way where we're able to use our private label business to help leverage our brand business. So when we bid on a piece of private label business, for example, for a customer, we'll agree to do that for them, but it also includes additional slots or additional distribution points for our branded product as well. And so we're able to piggyback those 2 together and growing really nicely, and that's worked well for us.

You talked about it a bit, but this whole idea of mix shift and moving from a holiday ham to Prime Fresh, you've delivered really nice share gains in packaged meats in particular, as you've done that. I think we might have talked about this on the earnings call last quarter, but any way to describe what inning you're in? Are there more products you can turn hams into?

Yes. I think that night, there was an 18 in, in baseball the night before. We know just through natural attrition, how categories are going to change. The holiday ham category, for example, we know as an industry, that category is going to decline at a rate of about 5% to 6% per year. Many people or younger people specifically aren't buying those big holiday hams anymore. So our strategy is to, as that natural decrease takes place to offset those with these other products we're talking about, and we've been very successful in doing that. So mix is ever evolving. Over the last 5 years, we've taken out 50% of our packaged meats SKUs so that we could simplify the business, we could have better cost structures in the business, and we could work with our customers to find out not only what works for us, but what works for them. And so I don't think mix is something that we can set a finish line on. It's something that's going to continue to happen. Innovation, we've turned the innovation pipeline back on over the last 3 years from flavor profiles to positions in the store, how we're leveraging a Nathan's hot dog, for example, in one part of the store with a Nathan's pretzel dog in the frozen case. So there's a lot of mix taking place there as well. So it's hard to say what inning we're in, but we're nowhere near done. And that's just on the product side. There's cost structure opportunities. We're really focused on our distribution network right now. Again, from that One Smithfield time frame, there's still a lot of -- we believe, a lot of redundancy and inefficiencies built into that, that we're focused on flushing out of our system. And so there's still a lot of work to do.

Maybe we can talk about innovation. You've had -- you just said you turned it on. You've had good success both in retail and foodservice. Can you just give some examples of how that's manifesting in your market share and maybe your ability to not have to promote as much or manage what's been a maybe challenging foodservice...

Yes. I think one of the best examples of that is in -- if you looked at third quarter data, you would see that across the landscape, there was a 9% or 10% increase in promoted volume as the industry. Actually, our promoted volume was down. And what we saw was in many of our categories, we actually increased our market share. And so a lot of what we talk about is being disciplined. It's easy to rush out and promote volume, but you have to have an end game. And so we've been very disciplined in that. Some of the innovation, it ranges from a foodservice customer who no longer wants uncooked bacon in their facility because they don't want to handle the grease and deal with the grease. So we can roast that product and render some of that fat out of it. So that's less to deal with. Recently, in New York City here, we had an activation for Smithfield and Mike's Hot Honey Bacon. I don't know if any of you happen to be handed a cup of bacon as you were walking through down by NASDAQ, but it was a lot of fun. We're moving a lot into flavor profiles that are more Latin and Asian, which is what a lot of consumers -- younger consumers are looking for. But it's also something that pairs really well with the pork protein in general. So a lot of things, again, across those 25 categories, each has a very distinct set of strategies and in some cases, personality that goes along with it. The trim complex, which feeds into our sausage category, dinner sausage category is growing. We're seeing it grow really nicely and taking market share there as well.

Maybe we could talk -- shift a little bit to the other segments and just start with the benefits of vertical integration. You touched on it a bit. I think that's an impressive point in terms of the record profit in the company, but not any one segment. So maybe that's the obvious answer in terms of the benefits. But what are the benefits versus competitors that aren't vertically integrated, especially as maybe there's different structural changes occurring in the market as well?

Yes. So vertical integration is always a key topic, right? I mean people want to understand it. And quite frankly, historically, I would tell you, we weren't very good at it. We -- our hog production business didn't run very well from a cost structure standpoint. And our fresh pork business was really the mindset, I think, was more about commodity trading fresh pork. So we've changed that mindset. And so again, I told you we were at almost 17.5 million hogs. There's a recognition that we didn't need that many. But being down at about 10 million -- 10 million to 11 million gives us that surety of supply that we can continue to run our fresh pork businesses and then buy that other 20 million hogs out on the independent market. Ultimately, if you think about how product flows through our categories, it's all set up to support our packaged meats business. If you take the hog carcass, so bellies, for example, we'll use roughly 100% of our bellies internally. So we're not buying bellies on the market nor are we selling bellies on the market. We'll use about 75%, 76% of our hams internally to convert into our ham packaged meats. We use about 76%, 77% of our trim. So I think being vertically integrated and having that a surety of supply, if we had to go out onto the market and buy 60 million bellies to support our bacon business, we wouldn't see the margin profile that we see today. And so I think it's extremely important to not be overweighted, but also to be just the right size. At the end of the day, in hog production, the strategy is to only be as big as we have to be in order to assure that supply all the way through the system. And in fresh pork, it's about cost. Our first customer is always our packaged meats business and then go sell the rest either in the domestic or the export markets. But again, all of our thought process around investment, around growth is all centered about how do we use more of our raw material in the process of growing our packaged meats business.

On hog production specifically, it's been a nice year for the segment, higher hog prices certainly helped. The forward curve, even though prices have come down, does suggest the industry should still be slightly profitable as we look to next year. I think you mentioned you were maybe opportunistic as you look ahead to the first half on the last quarter call as well. So putting all that together and kind of what you said about the hog price outlook and what you're seeing in the industry, how are you thinking about just the hog production outlook broadly, including other structural changes you're making as well?

Yes. Like I said, hog production is really -- you have to look at where the input grain costs are, so corn and soybean meal. Today, we had as the U.S. had a record harvest this year and so that tells us that 2026 is set up for a really nice grain complex. So we expect corn to be normalized. We expect soybean meal to be more normalized. One of the things we look at in some of the USDA reports is the stocks-to-use ratio. And typically and historically, any time that ratio was above 10%, it would tell you you're in a good pricing environment. And I think the most recent report had it 12% or 12.5%. So that tells us that 2026 is going to be a good pricing environment. Again, for the revenue side of the equation, again, I think we're pretty well balanced. So I don't -- I expect hog prices to be more normalized as we go through this year. If you look at the future strip today across 2026, it does show profitability. Again, when you look at that revenue side of that strip, there's not liquidity typically out past 6 months. So you're kind of looking at the underlying fundamentals out past that point. Those fundamentals being, I think people are still going to be looking for protein. I think beef is going to still be a ways away from a recovery. So I expect beef will still be priced relatively high. And that tells me that pork is really set up for a really nice 2026. And so I'm really bullish on how 2026 looks for us. I think the things that we have done that maybe weren't as transparent in 2025, you'll be able to have full visibility of in 2026 as we see some of those normalized raw material inputs come back, specifically in our packaged meats business. So I'm really optimistic and bullish about 2026.

Great. Sticking with hog production. So on the cost grains are most important, but you talked about this a little bit, just you've optimized the footprint. You reduced the size of the herd. You talked about genetics and improving herd genetics a bit at the beginning. You said last quarter on the call, I think there's still more work to do there. Can you elaborate on that?

Yes. Now it's about continuing to fine-tune, right? We took a lot of the -- we did a lot of the heavy-lifting. So we closed regions. We moved where they were just too geographically displaced to ever achieve a level of profitability. So while they may have good KPIs, good people, they were just too far from either the harvest facilities or from the grain belt where you could feed the hogs economically or you could harvest them economically -- transportation, we just couldn't overcome. So we've closed a lot of those areas. We have had farms that were historically high cost, more prone to disease, maybe a little less efficient than they should have been. We've rationalized those farms. And so now it's about how do we optimize our feed networks, how do we get grain here better? How do we improve our basis and those type of things that I believe we still have an opportunity when you couple that with our health initiatives. Health is a big issue in hog production and keeping your animals healthy, and it can be expensive when you don't. And so what we've done in the last 2 years is really focus on biosecurity. And the good thing about biosecurity is not always necessarily a capital investment. It's more process oriented. Should we run -- when should -- how should we stagger the trucks to run from farms to feed mills, for example? A lot of it's about process. And that's what we've been focused on is improving the processes. And so I think we'll continue to see improvements in our livability in overall disease and productivity. So I think we still have -- on the cost side of our equation, we still have some room to continue to improve that business.

Great. And then maybe lastly, with fresh pork, spreads were compressed this year, but you still delivered solid profitability. What's working well in your efforts to kind of capture the full value of the hog to call it?

Yes. If you looked at our business through the third quarter and compared it to the same time period last year, you would see that the normal market spread, there was a degradation of roughly, let's call it, $150 million, $155 million. We offset about $70 million to $75 million of that through just being better operators. So again, going back to the cost structures that we talked about, the automation, but also really developing more markets for our product. So we've really focused on building our domestic pet food markets where we can sell to Nestlé and Mars and Hill's. Our pharmaceutical channel, we're now harvesting mucosa, which comes out of the intestines of the pig, turning that into heparin, which is sold as an active ingredient in the pharmaceutical industry, thyroid glands, pancreatic glands. So a number of things in our pharmaceutical channel. Export markets, we've changed our approach to the whole business with the export markets in mind to a next best sell approach. Where is the next best sell for this product so we can achieve net realizable value of the whole carcass? From a labor standpoint, we've invested over the last 10 years, we've invested as a company, not specific to fresh pork, but as a total company, about a little over $4 billion in our U.S. infrastructure. That's gone into those automation, that technology. And what it allows us to do is repurpose that labor to other parts of the plant that maybe can't be automated. So we've seen improvements in our overall save rates in product that maybe 3 years ago was going to rendering because we didn't have the man hours to process it. That product is now being harvested and sold either domestically or externally. So a lot of things going into that. And I think the as I touched on earlier, taking that bottom 10% out so that we weren't making bad sales at the end of the day has made a big difference in our ability to just perform better. And we're seeing that when you compare it to the spread. And as you pointed out, this was an incredibly -- from a market basis, was a really difficult year in fresh pork, and I think our team performed extremely well from being nimble when -- back in April when tariffs were changing every day, and we had ships going one place and the next day, we were sending them somewhere else to, again, just embracing the different levers that we could pull to make sure at the end of the day, that 285-pound pig, we have a home for all 285 pounds and 20 pounds of it isn't going to rendering.

Okay. So maybe putting it all together, potential for a recovery in packaged meats margins as raw materials come down. You continue to drive mix shift innovation. It sounds like a good outlook for hog production at this point still and continue to execute on fresh pork. You said yourself you're bullish. So without asking for guidance, you've delivered a record year this year. Kind of how do you think about compounding that as we look ahead to '26?

Yes. I think I would answer that by saying, again, I'm really bullish on 2026. I think there are things that we're continuing to execute that, again, will come into clear visibility. One of the things we wanted to do when we came back to the market back in January, we deliberately showed our business in 3 segments. And that's because each of those 3 segments has its own unique set of strategies. And we want you as our investors to be able to follow along with those strategies and see how we're executing. And I think when you do that, what you see in each of those areas, whether that's hog production, we're doing what we said we were going to do. In fresh pork, we're executing against a commodity style market, but we're executing better than the industry. And in packaged meats, while the long-term algorithm hasn't changed, this year has shown pressure, but it's also shown you in spite of that pressure, we're still performing extremely well against our peers and continuing to expand the margin differential with them. So when I look at 2026 and seeing that we're not done yet, that we still have a lot of runway in front of us, both from a cost standpoint, from a mix standpoint and from a distribution standpoint, I think we have a lot of runway left.

Great. We have a couple of minutes left. I wanted to open it up to see if there's any questions in the room. It's the afternoon. Is the room full tired?

It's after lunch. Everybody's got the Italian sub hangover.

Okay. Capital allocation is always a great place to end. Really strong balance sheet. How are you thinking about paying nice dividend? How are you thinking about kind of the capital allocation priorities today? And you can -- maybe you can weave M&A in there specifically and just kind of how you -- what your priorities are...

Yes. So from a capital allocation standpoint, we're going to continue to reinvest in our business. We will spend roughly about $400 million a year in capital. Half of that will go to automation, technology, return on investment, capacity expansion. Half of that will go to normal infrastructure type repairs and maintenance. From an M&A standpoint, I would tell you the word we talk about a lot is disciplined. From a brand standpoint, we don't feel like we need to go chase M&A targets because of a brand. We believe we have really strong brands. So the idea of going and paying really high multiples for something just to add to our portfolio really doesn't make sense to us. Our M&A strategy, really, Nashville is the greatest example of that. The dry sausage acquisition that I referred to, that gave us 50 million pounds of capacity, but it fixed the problem for us. We knew that by the end of 2026, we were going to be out of dry sausage capacity. We also knew through that process that a new build would cost us upwards of $3 a pound. We were able to do that acquisition at a cost of about $0.80 per pound of capacity. So very opportunistic. And again, we weren't paying high multiples for brands or anything else. So we'll look for acquisitions to fix a problem for us. Mexico, we have a fresh pork and hog production operation in Mexico. We'll look to close that vertically integrated model down there through either greenfield investments in packaged meats or maybe through an acquisition that we can add on. Our customers here in the U.S. that also have retail operations down in Mexico are asking us for product made in Mexico for the Mexican market. So we have a built-in customer base for that already. So I think in 2026, you can look to hear some news about some things we're doing around Mexico as well. To your point, really strong balance sheet. Our leverage ratio is less than -- we're less than 1x levered. So a very disciplined approach to our balance sheet. And yes, so I'm looking for 2026 to -- we have a lot of dry powder, and we're ready to make some waves in '26.

Great. I think that's an awesome place to end. So thank you, Shane. Thank you for being here. Thanks, everyone, for joining, and I hope everyone has a great holiday.

Yes. Thank you all. Thank you.