Smithfield Foods, Inc. ($SFD)

Good morning. I'm Leah Jordan, the packaged food and food retail analyst at Goldman. And it is my pleasure to introduce Shane Smith, the President and CEO of Smithfield Foods. Thank you for joining us today.

Thank you, Leah.

So as a quick reminder, Smithfield is a vertically integrated pork producer and processor and is the leading supplier of packaged meat and fresh pork products across U.S. retail and foodservice channels. The company also exports fresh pork products to more than 30 markets around the world. Now let's get into our chat.

All right.

I just want to start off here. Smithfield returned to being a public company about 1.5 years ago. You reemerged as this more streamlined company under a one Smithfield model. You've improved your cost structure across your 3 different segments, ultimately supporting the strong packaged meats business. So maybe we could start out at a high level, just an overview of the transformation that you've been on over the last couple of years? And how does this position Smithfield better for the longer term?

Yes. Thank you, Leah. And I think you touched on a couple of key words there. So reemerged and transformation. So when we went essentially private back in 2013, we have been public for a number of years. During that time frame, leading up to 2013, we have been a highly acquisitive company. And the way we ran the operations was through the independent operating company model or the IOC model. And so what we started embarking on after coming off of the U.S. markets was really how do we unlock the synergies that existed through all of those acquisitions. And that's where we came up with this idea of One Smithfield. At one point in our history, we were supporting 40 different brands. We had multiple management teams, multiple distribution networks. So we've really been on this path of transforming the company into what we are today, which is a much leaner, much more agile, one company doing the right things. And what we've seen emerge from that is the business we have today. Prior to 2013, I think investors thought of us as a commodity-based investment. Today, we're really about our packaged meats business and the consumer-facing side of the company. We've repositioned all of the segments of the business from the very beginning of the supply chain and hog production through fresh pork to really support the packaged meats growth that we're seeing, both in a volume perspective and in an earnings perspective. And I would tell you today, we're a completely different company than we were back in 2013.

Yes. And we've seen really strong results over the past 1.5 years, which is great. And so we've talked about the 3 segments you have. Maybe we'll just start at the beginning of the supply chain with hogs production. In that business specifically, we've seen a really nice recovery over the past year. I think when we look out at the commodities, forward curves continue to suggest a very constructive backdrop for you. So maybe as you sit here today, what's your updated view on profitability for that business? How are you managing things like feed costs and any visibility there as well as on the supply side? And how do you think about the industry dynamic there as we head into the back half? And any optimization efforts as well that you've done?

Yes. So in our Hog Production segment, like you said, it's the first phase of our vertically integrated model. At our high point, we were raising close to 18 million hogs a year, so about 17.5 million. And that was a function of an old strategy, which was to be 50% vertically integrated. As we reevaluated that strategy and asked the question, how big do we really need to be to ensure that we have that steadier supply of pigs going into our fresh pork plant and then that meat going into our packaged meats business. And so we came up -- we looked at the total footprint of the business, and we came up with about 30%. We believe 30% is the right number for us, and that's really a function of math based on the different areas of the country. So we looked at the number we had, which was about 17.5 million and said, okay, where do we start taking hogs out? So we looked at areas that were what I would call geographically displaced, meaning they had high cost to get feed and other grain materials to the hogs and then they also had a high cost of transportation to get those hogs back to the plant. So we started there and we started thinking about places like Arizona and Utah. Then we started looking at our most productive farms and our least productive farms. And so we went through this process of lowering our numbers. And I think by 2024, we had gone from 17.5 million to about 14 million. Today, 2025, we finished at around 11 million. And that's been through, again, those rationalization efforts, and it's also been through converting some of our larger contract growers into independent hog producers. And that's been really successful for us, too. We still have a goal to get to about 10 million. Again, today, we're about 11 million, a little over 11 million, but we're still working toward that goal of that 30% level of vertical integration.

That's great. Maybe we'll just shift then into fresh pork. Obviously, an interplay with the hog production business as well. And so we saw some spread compression last year given the commodity backdrop. But the outlook you have for this year suggests an improvement. And I think a lot of that is more being driven by execution on your side. So any more color there, how you're thinking about the fresh pork business, the puts and takes we should keep in mind for this year? And how much of that really is in your control?

Yes. So our fresh pork team has really done a great job, and you used the right word, execution. Fresh pork is really about cost and can be the low-cost, most efficient producer out there. So we've gone through a number of things in our fresh pork business to create that best-in-class cost structure. We've invested in automation. We've invested in technology. We've closed some plants and rationalized some killing plants. We've created flexibility. One of the things that historically had hindered us was we had a system that was built to run at over 100% of capacity. Now the problem with that is when you have a problem, you can't just make that back up. You're running overtime, extended hours. So creating flexibility in our fresh pork business. And we've seen that really pay off. As we kind of look at the business today, what we see is a model where we talk about the net realizable value of each part of the pig, do we have a channel for each part of the pig, whether that's an export market. We've really grown our pharmaceutical channel. We've grown in things like pet food to make sure we're using all of those. But even on the meat cuts, we've really focused on the domestic markets. We had lost a lot of share in the domestic markets. So we've brought that back. We've added value-added case-ready, marinated, so trying to add value to the fresh pork complex. And we've seen that really pay off for us as well. And we've also moved back into some channels that I would say historically, we had neglected and foodservice is a great example of that. We've moved really strong back into the fresh pork food service channel. In our quarter 1, we were up about 27% in volume. So really looking at every angle in fresh pork. Our first and best sale is always to our packaged meats business. And so when you think about that as a component, the different components of the pig, the bellies, we're using nearly all of our bellies in our bacon business. We're using nearly all of our hams and our trim. So it's really about those retail cuts now. Where do we sell the loins, and is that domestic? Is that export, but complex. But I would say the team today, the fresh pork team is doing an outstanding job. And we actually brought over several years ago, we brought over some of the -- we started cross-pollinating, if you will, and bringing in some of our really good people in packaged meats into the fresh pork business to help us think about that as more than just a commodity business. And so we're -- again, we're seeing the benefits of that today. The fresh pork team is doing well. You mentioned the spread compression last year. We were able to offset a tremendous amount of that spread last year. So really excited about where we're going to go in fresh pork and viewing it more than a commodity side of our business, and the team is doing a really nice job.

Yes, we've seen that execution and the distribution gains across those other customers, but that's really coming through. And I think a lot of this, right, you talked about how the right level of hogs goes into ultimately supporting the packaged meats business. And so maybe as we talk a little bit more about that, I think as this is a consumer backdrop, ultimately the end consumer demand, maybe we'll start there. Just what are you seeing on the demand side? I think protein continues to be an area of strength, but the macro dynamic has been pretty dynamic at least. So what are you seeing maybe shift between retail and foodservice or shift across your brands and portfolio giving you have such a wide range of price points?

From a consumer standpoint, protein is still in very high demand, and it's a part of the overall basket. So we're still seeing good demand from the protein complex. And pork specifically, as it's positioned now with beef. So we're seeing consumers, they're still picking up the product. They're still buying protein. We are seeing some cautious behavior, but I think that plays into part of our pricing strategy. Our pricing strategy and brand strategy has been to be present across the entirety of the pricing spectrum. So from the high end all the way to the value side. And then 40% of our retail business is in private label. And we did a lot of work over the past few years rightsizing those contracts to where now the margin differential between a private label and a branded product really isn't that extreme. Now what's interesting in this environment, what we've seen in some of our categories, and I'll use packaged lunch meat, for example. We launched a Prime Fresh product several years ago, and that product is priced at the upper end of the spectrum. We saw a 25% increase in volume and an 18% increase in points of distribution just in the first quarter. So you're still seeing consumers pick up the high level. You're seeing them move through the brands. Overall, I would say consumers right now are looking for value for their money. Are they getting what they're paying for? And I think with our brand strategy, our pricing strategy, our access to private label, working with our customers on what's coming next, and we can do that because of our scale and our redundancy, we're seeing that in our business. If you look at branded and private label, our branded retail business was actually up about 1.6% in the first quarter. So we're still seeing brands coming off the shelf. And I think that's a combination of our brand loyalty. We've been around for 90 years. Customers know our brands. But it's also -- when you think about it in the context of private label, there's been over the past several years, there's been a premiumization of private label as well. So it's not just that entry-level price point anymore. And so for us, and again, the way we've positioned our portfolio across the categories, the 25 categories that we operate in, I think we're in a good position. I think, again, consumers are still looking for protein as a part of their overall diet. I think with pork specifically, as it relates to some of the other proteins, there's a versatility to pork that you don't see in other areas. It's present at every day part. So whether you're having breakfast, lunch, dinner or snacks, you can find some type of pork offering there and the price points of it. And so when we look at the outlook for the year, we think we're in a really good position.

That's great to hear and definitely see the range of price points you offer. And I think ultimately, what we're seeing with the consumer, right, the dynamic backdrop is mixed, but value kind of means something different to everybody, and you're giving that range of the portfolio. But I think just on that point of value added, and you talked about it with the fresh pork a little bit, and we're seeing it here in packaged meat is that you're adding more value-added options to your portfolio. We've seen that be a tailwind to the top line and margins. But maybe we could dig in further. What have you done on the value-added side? How much more opportunity do you see there? And ultimately, if we see more macro pressure on the consumer, how do you think about the puts and takes to continued shift to value-added going forward?

When we talk about mix shift, and that's been something we've really been focused on the last, I'd say, the last 5 years. When you look at -- and it's specific to each category. So every category is nuanced a little bit differently. So I'll use the holiday ham category. That's a big volume category, but we know that category is declining at a rate of 5% to 6% a year. And so consumers just aren't buying those 20-pound hams for Easter and Christmas. So then it comes on us, how do we use innovation, how do we use mix shift to change that 25 or 20-pound ham into something they can use every day. And that's where the Prime Fresh is coming out of that complex. So when we see volume in certain categories falling, we're relying on that continuing evolution of mix, where is the consumer going? What do they want? We've come out with some really nice products just this year that are meeting that consumer where they are from a purchasing standpoint, from a flavor profile. Sometimes it's something as simple as a slightly smaller package that fits their household. And so our innovation team has done a really nice job staying in front of that. We are looking as we change our mix to continue to move to that higher margin, more value-added. I'll go back again to the Prime Fresh example. That's a product we created through innovation that solved the problem for our customer. The customer was having a problem staffing the deli counters. And so we said, let us bring that in-house. And we created a fantastic product that is just growing at light speed to the point where we're investing to stay ahead of that. And it's a much higher margin than what we would have seen in the holiday ham, and it's in a growing category. Another area is in our dry sausage category. That's an area that we're growing really fast growing for us. We just added capacity in Nashville through an acquisition that we did through Cargill. So those are the things we're talking about, how do you stay in front of the consumer. Sometimes it's subtle. It's a packaging size, it's a flavor profile. And sometimes it can be a little more complex like creating a whole different category or something within a subcategory to continue to meet that customer and keep them picking up your product.

Yes, absolutely. So that innovation, right, that's kind of led to a lot of share gains, especially for lunch meat, dry sausage, as you mentioned. I think we're seeing it in other categories as well. Maybe you could just talk more about the share gains. How do you think about that turning as we go to the back half? It sounded like with lunch meat, right, you gained a lot of shelf space by providing an incremental service that was saving the retailer. So how do you think about velocity versus distribution gains as tailwind with gaining share as we head to the back half? How much is innovation still going to be a factor going forward?

Yes. I think it's a combination of a number of things. And so if you look across the 25 categories, we had points of distribution gain just in the first quarter of over 5.5%. Our Nathan's products, those points of distribution were up more than 21%. So increasing the points of distribution is really the leading indicator of where we're going to see volume growth. Innovation helped drive volume growth across our portfolio. We saw a 12% volume increase in our Armour dry sausage and again, 26% volume increase in Prime Fresh, and that's just in the first quarter. So when we think about innovation in Smithfield, it's really a pillar of our packaged meats business. And we're intent on keeping a really robust pipeline of new products coming out, and they're not all going to succeed. And so we want to keep rolling out new products, meeting that customer where they are, making sure we have the product that they want to pick up. And so innovation is really what's going to drive this next phase of Smithfield.

Yes. We've seen a lot of that innovation come through. And I know we always want to know what's the next thing, but they won't tell us until we have to wait and see like everybody else. And then maybe just kind of rounding out this discussion just on the competitive environment. I think protein is selling well, but there's still a mixed consumer backdrop and you're competing with different people at different price points. So maybe just the competitive environment for packaged meats overall, anything by category and maybe how you're thinking about how that could evolve as we go into the back half?

Yes. We are seeing competitors increasing their promoted volume. For us, when we think about some of the promoted volume we see, we think that's really a short list. We don't think that's something that's going to be sustainable, nor do we think it's really healthy for the long-term health of the brand. So when we think about and talk about promotional, we're really focused on quality merchandise. And then looking at what we're doing and what is that overall return on investment. We've seen improvement with our promoted volume, the things that we're selling on feature and display. And that's been for us, that feature and display model has been our most impactful median to get into the -- stay with that consumer. And again, as I mentioned in the first quarter of this year, our branded volume was up about 1.6%. We gained share of volume growth of about 4/10 of a percent. And that kind of tells us the customers are still looking at our products, still picking up our branded products, and we'll continue to invest in brands. We've increased our marketing spend this year to kind of build on a lot of the momentum that we saw coming out of 2025. But it's still -- it's not a peanut butter spread. It's a very surgical approach to where we want to promote, where do we want to -- how do we want to support the brands, with the brand strategy that we have now, we've bucketed our 12 core brands into our national brands, so the things we'll support at a national level. Our regional brands, which we still, through acquisitions, historical acquisitions, we still have a lot of really strong regional brands. So we'll continue to support those. The value brands, again, to stay all the way on that pricing spectrum and then some specialty brands like you see in our dry sausage categories or meat ball categories.

Okay. That's great color. And I think you said you planned for more marketing spend this year. I think something if we think about that was unplanned for this year is maybe global conflict that's causing some changes around the cost structure for different folks. So I think you have a benefit of being vertically integrated, but there is always the discussion we have with investors around what does the rising input cost mean for the packaged meat business. So maybe you could just talk about what you're seeing on the raw material side. How do you expect that to evolve in the back half? And I think ultimately, what are mitigation strategies you have to address that?

Yes. So in 2025, we saw the strong protein demand really kept raw material costs high. We did see some of that alleviate in the first quarter in many of the things outside of trim. I'm talking about pork specifically, but we're still seeing higher cost in beef and turkey. For the pork complex, this year, USDA is expecting about a 1.4% increase in overall pork production. But for Smithfield, a lot of the -- and as I mentioned before, a lot of the material coming out of our pork segment is going into our packaged meat segment. So we have the benefit of being present along the whole value chain. And so if you -- again, you think about the complexes, the belly complex, we're going to use nearly all of those. The ham complex, the vast majority of that. And the way we move our transfer pricing, we stay at market. So we move hogs into the fresh pork segment at a market-based rate and we move fresh pork into packaged meats at a market-based rate. And that gives us the ability to really see the signals that are coming across the industry. So -- but for raw material this year, with the increases that we're seeing, again, trim is staying high. The belly complex in the first quarter has been low. And we'll kind of see how that plays out for the year. But we feel like somewhere along our chain. So that's the beauty of the vertically integrated model. If we see profit migration in fresh pork, we're able to capture that. If we see it in hog production, we're able to capture that. And then ultimately, in packaged meats, where we have the majority of our pricing ability is located in the packaged meat segment. And so again, our pricing strategies, I talked about that being on the spectrum. So we'll see people move up and down. We'll see some move to private label. But ultimately, we're keeping them in our overall portfolio. And so yes, the consumer is under pressure. They're very cautious, and we see that and we hear that. And what we're doing to stay in front of that, again, is to continue to meet that customer or that consumer where they are with a product that fits their budget profile.

Yes. That's very helpful color. And I know we'll all have to be watching the commodities move, but you guys have been very resilient given the challenges over the last couple of years. But maybe just more specifically on the freight side as well. We've heard some others talk about capacity issues. So any color on your capacity there, maybe how your contracts work and just how you're thinking about that cost pressure or anything on diesel going forward?

Yes. The nearest-term watchout is clearly diesel and freight. I mean that's caused the most discussion across all industries over the -- really over the month of April and now coming out of March. And that higher fuel volatility is having an impact on transportation costs. Now we started a network optimization probably 3 years ago. So we actually -- '25 compared to '24, we had taken about 1 million miles out of our distribution and had that same plan for '26 compared to '25. So we're really focused on the cost side -- of taking cost out of the system. We've also been changing our overall footprint in freight to where we're using dedicated, our own internal fleet. We've also added in some intermodal where it makes some financial sense. And those things have driven some really meaningful gains for us. And then ultimately, at the end of the day, you have to look to your pricing strategies and how much of this can be passed on, when can it be passed on. And that's a very real conversation that you have to have with fuel costs staying up at the levels that we see on that today. But for us, whether you're talking about freight or just overall efficiencies, really comes down to cost improvement, cost execution. Every year, as we kind of go into the budgeting process and thinking about the next year, we always go into that process with the idea of how do we offset inflation. How do we add automation? How do we add technology? And we've been really successful in that. And I think in many cases, been a first mover in some of the automation and technology to continue to find ways to offset cost increases. This is my fifth year as CEO. And every year, I think next year, there's not going to be an emergency next year. It's going to be normal. So these things, no matter what the disruption is, it's kind of woven through our DNA right now. We're always looking to be more efficient. We're always looking at better ways to optimize. We're always looking at better ways to invest. And this year, it's on the transportation side. So how do we continue to evolve from the ways we used to go to market? How do we continue to evolve that today? And that's what the team is really focused on. And I think they're doing an excellent job. And I think as we move through this year, as we continue to talk about these things as there's more and more clarity, it will become clear to the investor groups that we're doing a good job of managing the overall cost index.

Yes. We've seen it so far, all the more resilient margin profile, for sure. Maybe as we put together this discussion, we've talked about some headwinds with mix on the consumer, maybe some near-term cost pressures. Ultimately, these get passed on, but other tailwinds with share gains and better cost structure. Maybe at a high level, just talk through the puts and takes we should think about for your FY '26 outlook. What are the biggest swing factors you're watching or the risk to get to the high end or the low end?

Yes. I would say, as we look at 2026, we feel really good. We came off of 2025, which was a record year for us. And what's interesting in that, it wasn't a record year for any individual segment. And so we see that vertically integrated model working the way it's supposed to. We followed that up in Q1 with another record quarter. I mean, so we've got a lot of momentum coming in as we kind of go through 2026. I would say our teams, whether they're in the hog production team, the fresh pork team or packaged meats or transportation, they're executing really well, and they're really focused on being efficient, taking cost out of our overall system. So I feel really good from the input and the cost side of our business as well. And I still see a strong demand for protein. Consumers are still looking for protein. Pork is really well positioned in the overall protein complex. Again, we've talked about the versatility of that. So I feel really good about as we sit and look at the back half of the year about the positioning of pork. We touched on just a few of the gains that we've seen in our packaged meats business, but we're seeing that across 25 categories. We just touched on a few of them, but we see strength in the categories as well. In fresh pork, foodservice is really a category that's going to be really strong for us, the value-added component that we're adding to fresh pork, the lessons that we've learned over history from packaged meats and how we can market that to the consumer is really paying off. And so when we think about our outlook for the year, we feel really good about where we're sitting today and what we see and how we're positioned to deal with that. If you think about some of the volatility that we see, it's playing into the strategies that we've had in place for several years now. So we feel really good about where we are.

That's great to hear. I mean we saw the momentum in the first quarter, and good to hear that that's still holding through the year. Maybe we'll just switch over to capital allocation. I mean I think one thing that seems to be still underappreciated is just your strong cash generation, your very low leverage, well below your target. So maybe that leads us to how are you thinking about capital allocation today? Any updated views on how you think about payout ratio or M&A in this environment?

Yes. We have a really strong balance sheet, and the team has done a great job. Our Treasurer, Jenifer Byrd and I were here many years ago back in -- gosh, all the way back in '08 and '09, and it's just incredibly different than what it was then. So our leverage right now, when we ended Q1, it was 0.4x, really strong liquidity. So from a capital allocation standpoint, we'll continue to invest $350 million to $450 million per year in our U.S. infrastructure. You can think about that -- probably 50% of that will go to capacity to automation, to technology and the other 50% will go to more infrastructure type items. Shareholder return, we're talking about and have disclosed that we'll be doing a dividend of $1.25. So a strong return to our shareholders through the form of a dividend. From an M&A perspective, I would tell you, our approach to M&A is disciplined. So we don't believe that we need to go chase brands and pay high multiples. We look for M&A to potentially fix the problem. And so when you look at the -- one of the acquisitions we did in Nashville, we bought a dry sausage facility from Cargill. The problem that fix for us is that's a category for us. It is a high-margin category and growing. And we knew we would be out of capacity in 2026. So we were able to buy that at a very attractive rate per pound of capacity and add that to our overall network and allowed us to really optimize our whole dry sausage network. Nathan's is the most recent one that we've talked about. That's the one that is out there right now. With Nathan's, the problem that fixes for us -- we have on owned and manufactured Nathan's and owned the licensing rights at retail for over 10 years now. So we've been making Nathan's products. That agreement comes up in about 6 years. And so this was an opportunity to really own those rights into perpetuity. And so that was the idea behind Nathan's. Other M&A we think about is potentially in Mexico. In Mexico, we have the fresh pork business. We have the hog production business. We don't have the packaged meats business yet. And we have customers who are based in the U.S., who are expanding their operations in Mexico, who are asking us to have packaged meats capacity. That could be through a greenfield. It could be through M&A. But what I would say, just in general, from a philosophical standpoint, our approach to M&A is going to be very disciplined. We're not going to go out and chase things. They've got to make sense. They've got to fit our overall investment thesis. And that's how we'll think about growing through M&A in the future.

That's very helpful. This has been a very informative chat, a lot of great momentum in the business and strong execution on your end. Maybe we just -- we have to wrap up here. I mean, as we close this session, anything else you would like the audience to take away on Smithfield?

For the audience, I would love for you to take away a few things. So one, all of the commitments that we made through the IPO process, we're delivering on those commitments. I would challenge you to go back and look at the company that has evolved into what we see today. We're a 90-year-old company, but we're relatively new. And that's kind of the way we think about ourselves. We're not the same Smithfield that we were back in 2013. Our business today is focused on that consumer-facing part through our packaged meats business. But for the other parts of our business, hog production and fresh pork, it's a different philosophy the way we think about those today. Everything we do is to support our packaged meats business, whether that's in the hogs that we raised to assure the supply, whether that's in the fresh pork business to make sure that packaged meats always has what they need to grow. And so a completely different philosophy than the one we had when we were last public. So I would tell you, continue to watch us. We're going to continue to deliver on the things we tell you we're going to. We're excited about 2026. We think we're extremely well positioned, especially in this environment. And we look forward to reporting back more over the coming quarters.

Thank you, Shane. I think we will leave it there. That was a great color. Thank you.