Source:  Lisa M. Keefe, MEATINGPLACE.COM, 5/20/10

"I'm showing you a different view of Smithfield, not the traditional charts," C. Larry Pope told analysts at the BMO Capital Markets Agriculture, Protein and Fertilizer Conference in New York on Wednesday, "We have changed the focus of the company toward a CPG (consumer packaged goods) strategy.

"We've changed the basic drivers of this business and I want to show you where we stand relative to that," Pope said.

Without discussing the company's current financial performance — Smithfield will announce its fiscal 2010 full-year results in a few weeks — Pope and Chief Financial Officer Bo Manly nevertheless drew a picture of a company driven by brand affinity and retail sales, rather than by the volatile commodity margins that have rocked the company's financials in the past.

"People buy Smithfield brands under different banners over a billion times a year. That's one of our products with our logo and brand on it, not just a private label brand," Pope said.

Fewer brands

Smithfield has been, and will continue, to "migrate" smaller brands into appropriate larger brands, and expects to reduce its portfolio of some 100 brand names internationally to about a dozen. In answer to a question, however, Pope indicated that Smithfield has no plans to operate under just one or a few mega-brand names.

"The costs associated with making one of these the big brand, that's very expensive," he said. "To take a Smithfield brand to California would take years and years and lots of money, but conversely to take Farmland to East Coast is an expensive and long-term project."

Pork to China

Pope also noted that, for the first time in more than a year, Smithfield last week resumed pork sales to China. China has been a major market for the company's products in the past, as Smithfield raises hogs without ractopamine — a banned substance in China — specifically for sale of the products there. However, China closed its doors to all U.S. pork shipments with the outbreak of H1N1 flu in April 2009.

"We have now the first [purchase orders] in hand for new Chinese business. Those shipments are being prepared," CFO Manly said. The shipments are small, and consist of offal and internal organs rather than chops, loins or bellies, Pope said.

Positive outlook

Pope also noted Smithfield's improved financial liquidity and 25 percent reduction in overall debt, to about $3 billion, as well as held down capital expenditures. Two years ago the company's debt load had analysts concerned and bankers had attached covenants to its loans. He said that Smithfield intends to pay down another $1 billion in debt.

"The company anticipates — and I hate making projections — that the hog production side … should be in a period of good profitability," since the sow herd has been reduced in the last year and prices have risen. Supply probably will rise in response to higher prices, but just as Smithfield led to way in reducing the size of its herd over the last two years, the company has no plans to boost the size of its herd now that prices are up, he said.

Analyst reaction

Later on Wednesday, JPMorgan equity analyst Ken Goldman released a note to investors in which he maintained his rating on the stock as "overweight" but lowered his estimates for earnings per share in fiscal 2011 to $1.93 from his previous projection of $2.14.

Pope's indication that he expects profits from hog farming this year to be closer to $10 a head than $15 a head was lower than Goldman's estimates of about $15 a head.

Also, Goldman wrote, Smithfield's strategy for hedging its commodities in the market can backfire badly if prices move in the wrong direction; other companies, such as Sanderson Farms and Tyson, buy and sell closer to the market which makes its effect on a company's earnings easier to see. Smithfield's hedging losses, on the other hand, have surprised analysts in recent years.

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