Smithfield Foods Management Discusses Q2 2013 Results - Earnings Call Transcript
December 6, 2012 1:20 PM ET
Smithfield Foods (SFD)
Q2 2013 Earnings Call
December 06, 2012 9:00 am ET
Keira L. Lombardo - Vice President of Investor Relations and Corporate Communications
C. Larry Pope - Chief Executive Officer, President, Executive Director and Member of Executive Committee
Robert W. Manly - Chief Financial Officer and Executive Vice President
Farha Aslam - Stephens Inc., Research Division
Christine McCracken - Cleveland Research Company
Heather L. Jones - BB&T Capital Markets, Research Division
Timothy S. Ramey - D.A. Davidson & Co., Research Division
Kenneth B. Zaslow - BMO Capital Markets U.S.
Rohan M. Patkar - KeyBanc Capital Markets Inc., Research Division
Tim J. Tiberio - Miller Tabak + Co., LLC, Research Division
Robert Moskow - Crédit Suisse AG, Research Division
Ladies and gentlemen, thank you for standing by. Welcome to the Smithfield Foods Fiscal 2013 Second Quarter Earnings Teleconference. [Operator Instructions] As a reminder, this conference is being recorded.
I'd now like to turn the conference over to our host, Ms. Keira Lombardo. Please go ahead.
Keira L. Lombardo
Good morning. Welcome to the conference call to discuss Smithfield Foods' fiscal 2013 second quarter results. We'd like to caution you that in today's call, there may be forward-looking statements within the meaning of federal securities laws. In light of the risks and uncertainties involved, we encourage you to read the Forward-Looking Information section of the company's 10-K for fiscal year 2012. You can access the 10-K and our press release on our website at smithfieldfoods.com.
On our call today are Larry Pope, President and CEO; and Bo Manly, CFO. This is Keira Lombardo, Vice President of Investor Relations.
Larry will begin our call this morning with a review of operations, followed by Bo, who will review the company's financial results. Then Larry will provide our outlook for the future, after which the line will be opened for questions. Larry?
C. Larry Pope
Thank you, Keira, and good morning and happy holidays to each of you. I hope you had an opportunity to enjoy one of our spiral hams over the Thanksgiving holiday. Hope you did and you still have another opportunity to enjoy this excellent product over the Christmas holidays and I hope you do.
On the business front, I'm pleased to report a very solid second quarter for Smithfield. We are reporting adjusted quarterly earnings of $0.61 a share this year versus adjusted earnings of $0.76 a share last year. As I'm sure you saw, we took a big charge this quarter related to buying back some very high cost debt, which was refinanced with a new piece of debt at a much lower interest rate and a longer maturity. From our standpoint, we are in the final stages of cleaning up a high price debt overhang we have been laboring under since 2008. This will be finally cleaned up next summer when the $400 million convertible note issue matures and is retired.
I'm sure you're all surprised by the strong results in fresh pork and many of you were surprised by the results in hog production. Bo Manly will give you more color on these in his report. But suffice it to say, I am proud of this management team and the smart way we are managing the commodity and volatile side of this business. I cannot assure you that we will always achieve such stark differences between your expectations and our results. But I will assure you, we are approaching this business with the goal of reducing volatility and improving the fundamentals of these 2 segments in a smart way.
I hope you took note of the significant amount of stock we bought back during the quarter and the amount we have repurchased since we initiated the new repurchase program back in the summer of 2011. The fact that the company has repurchased a total of $575 million or 17% of the outstanding shares in such a short period should give you some indication of how strong that we feel our stock is undervalued. Our comment on the last call, if you didn't like the stock, I would buy it.
Our purchases totaling 11.6 million shares for $240 million and 7% of the outstanding shares just since the last quarter, I should tell you, I meant what I said. Looking forward, we will be taking a balanced approach to share buybacks. We have a number of very good internal projects we want to fund, which are very strategic and have good paybacks. However, we will continue to look at the proper allocation of capital, and buying back our shares, when we feel they are undervalued, will remain front and center in our thought process.
We will also pursue growth through acquisitions in a very measured way in the value-added packaged meats area if those should appear. When we look at this -- when you look at this company, I ask you to step back a bit and really look at what you're investing in. Smithfield Foods is essentially 2 companies, a commodity-based live production company and a fresh and processed consumer packaged meats company.
The consumer packaged meats company generates, just the packaged meat side, approximately $6 billion in annual sales, larger than many of our competitors in the same packaged meat space. That business, combined with our fresh pork business, generates $600 million to $700 million in operating profits and even more on an EBITDA basis.
If you value this segment, like our competitors, I will think -- I think you will see this business alone is essentially worth more than the whole market capitalization of Smithfield Foods. That means our live production and international business all combined are worth very little. Do you really believe that? I know that you are very concerned about the profitability or lack thereof of our live production business over the last few years and think our international business has never produced a profit that much mattered. We'll consider this. We began investing in live production back in the late 1980s. This business was very profitable for a number of years and carried the company and allowed us to invest in many of the packaged meats business as we own today.
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