Executive Summary / Key Takeaways

• Smithfield Foods has fundamentally transformed into a packaged meats-focused company with a leading market position, supported by a vertically integrated model and strategic reduction of commodity exposure in hog production.
• The company delivered record first quarter 2025 operating profit and net income, demonstrating the strength of its integrated strategy and a significant turnaround in its Hog Production segment from the prior year's challenging market conditions.
• Strategic initiatives, including optimizing the product mix towards higher-margin packaged meats like lunch meat and dry sausage, investing in automation and operational efficiencies, and resizing the Hog Production business, are expected to drive continued profitability growth.
• Smithfield maintains a robust financial position with strong liquidity and a low net debt-to-adjusted EBITDA ratio, providing flexibility for strategic investments and supporting its commitment to returning value to shareholders through dividends.
• While facing risks from commodity price volatility, geopolitical tensions (particularly tariffs), and a cautious consumer environment, the company's diversified channels, brand portfolio, and focus on cost efficiency are key mitigants.

A New Chapter: Smithfield's Strategic Evolution

Smithfield Foods, Inc. (SFD), an American food company with roots tracing back to 1936, has embarked on a significant transformation over the past decade, culminating in its return to the U.S. public equity market in January 2025. Once known primarily as a pork producer, the company has strategically pivoted to become a leader in the value-added packaged meats market, while simultaneously optimizing its vertically integrated structure to reduce exposure to volatile commodity cycles. This strategic evolution, underpinned by operational improvements and a focus on higher-margin products, forms the core of the investment thesis for the modern Smithfield.

Operating across three main segments – Packaged Meats, Fresh Pork, and Hog Production – alongside smaller Mexico and Bioscience operations, Smithfield leverages its integrated model to control quality and supply from farm to fork. This integration, particularly the relationship between Hog Production and Fresh Pork supplying raw materials to the Packaged Meats segment, is a foundational strength. However, the inherent volatility of the Hog Production business, heavily influenced by fluctuating feed ingredient (corn, soybean meal) and live hog prices, has historically impacted overall profitability. Recognizing this, a key strategic pillar has been the "Hog Production Reform" initiative, launched in 2023, aimed at optimizing the segment's size and cost structure. This involves reducing the number of company-owned hogs produced from a peak of 17.6 million in 2019 to an expected 11.5 million in 2025, with a medium-term goal of reaching approximately 30% of the Fresh Pork segment's needs. This resizing, partly achieved through partnerships like those with Murphy Family Farms and VisionAg, transitions volume to external producers under supply agreements, assuring consistency while lowering Smithfield's direct commodity market risk.

Within the competitive landscape, Smithfield operates alongside major players like JBS USA, Cargill Meat Solutions, Tyson Foods (TSN), and Hormel Foods (HRL), as well as smaller processors and emerging indirect competitors in plant-based proteins. Smithfield holds a leading position as the number one pork processor and the number two branded provider of packaged meats by volume in the U.S., competing across 25 key categories. While competitors like JBS and Cargill possess immense scale and global reach, and Hormel excels in premium branding and innovation, Smithfield differentiates itself through its deep vertical integration (though strategically being resized), a broad portfolio spanning branded and private label offerings across multiple price points, and a focus on operational efficiency. This allows Smithfield to capture consumer demand across various economic situations and serve as a strategic partner to retailers and foodservice customers, particularly in the growing private label space where its quality and food safety focus provide a competitive edge over manufacturers lacking similar capabilities.

Technology and Operational Excellence: Fueling Efficiency and Value

A critical component of Smithfield's strategy and competitive positioning is its commitment to operational excellence and the integration of technology. While not a technology company in the traditional sense, significant investments have been made to enhance manufacturing efficiency and reduce costs. Over $3 billion in capital expenditures since 2013 have been directed towards automating processes and improving plant capabilities, particularly within the Packaged Meats segment to support increased capacity for higher-margin products. These investments aim to redeploy labor to higher-value tasks, increase yields, and streamline operations, directly contributing to a lower manufacturing cost structure.

In the Hog Production segment, technological advancements are focused on genetic transformation and herd health improvements. A multi-year genetic changeover project, nearing completion, is designed to enhance sow productivity (PMSY - pigs weaned per sow per year), directly impacting the cost structure of raising hogs. While management noted this new genetic line presents some health challenges, practices are being implemented to mitigate these. These efforts in genetics and health, combined with procurement and nutrition savings, are central to operating a best-in-class cost structure on retained farms, a key factor in the segment's recent turnaround.

Across the supply chain, the focus is on optimizing logistics and distribution to improve service levels while reducing transportation and warehousing costs. This includes initiatives like improving carrier mix, maximizing asset utilization, and optimizing inventory levels through better planning. These operational efficiencies are expected to contribute meaningfully to profitability, aiming to more than offset inflationary pressures annually.

Compared to rivals, Smithfield's vertical integration provides a degree of control over raw material costs and supply chain efficiency that pure processors may lack. While competitors like Cargill leverage advanced technology for supply chain optimization, Smithfield's investment in automation and its integrated model offer a different path to efficiency and cost control, supporting its goal to be a low-cost producer in Fresh Pork. The strategic resizing of Hog Production further refines this, aiming for the benefits of integration without the full volatility exposure of a larger owned herd.

Financial Performance and Outlook: Building on Momentum

Smithfield's strategic transformation and operational focus are translating into improved financial performance. Fiscal year 2024 marked a significant rebound, with adjusted operating profit exceeding $1 billion, a substantial increase from $258 million in 2023. This recovery was largely driven by a more than $600 million improvement in the Hog Production segment, benefiting from improved market conditions and the initial impacts of optimization efforts, alongside another year of record profitability in the Packaged Meats segment.

The momentum continued into the first quarter of fiscal 2025, which delivered record operating profit and net income for the company as a whole. Consolidated sales increased by 9.5% year-over-year to $3.77 billion. This growth was primarily fueled by a 32% surge in Hog Production sales (driven by higher market prices, external grain/feed sales, and the sale of commercial inventories to new partners, despite a 21% volume decrease) and a 4.9% increase in Fresh Pork sales (due to higher average sales prices reflecting lower supply and steady demand). Packaged Meats sales saw a modest 1.2% increase, with a 5.7% rise in average sales price (reflecting higher raw material costs and favorable mix) offsetting a 4.2% volume decrease (attributed to the later timing of Easter).

Profitability saw dramatic improvement in Q1 2025. Adjusted operating profit reached $326 million (8.6% margin), an 86% increase from $176 million (5.1% margin) in Q1 2024. This was largely driven by the Hog Production segment's turnaround, posting a $1 million profit compared to a $174 million loss in the prior year period. The Packaged Meats segment delivered a robust $266 million in adjusted operating profit (13.1% margin), while Fresh Pork contributed $82 million (4.0% margin). Lower manufacturing, distribution, and SG&A costs across the organization also contributed to the improved results.

Smithfield maintains a strong balance sheet, ending Q1 2025 with $3.2 billion in liquidity ($928 million cash and equivalents plus credit facility availability), well above its $1 billion policy threshold. The net debt to adjusted EBITDA ratio stood at a low 0.7x, significantly below the policy maximum of 2x, providing ample financial flexibility. The company refinanced its $2.1 billion revolving credit facility in February 2025, extending maturity to 2030.

Looking ahead, Smithfield reaffirmed its fiscal 2025 outlook, anticipating continued operating profit expansion despite challenging market conditions. Total company sales are projected to increase in the low to mid-single-digit percent range. Segment adjusted operating profit guidance is set at $1.05 billion to $1.15 billion for Packaged Meats, $150 million to $250 million for Fresh Pork, and a range between a loss of $50 million and a profit of $50 million for Hog Production. This implies a total company adjusted operating profit range of $1.1 billion to $1.3 billion. Capital expenditures are planned between $400 million and $500 million, with over half dedicated to ROI-generating projects like packaged meats capacity expansion and automation. The company is committed to returning value, expecting to pay $1 per share in annual dividends in 2025, consistent with its policy of approximately 50% of net income.

Key Risks and Mitigants

Despite the positive trajectory, Smithfield faces several notable risks. Commodity price volatility for hogs, corn, and soybean meal remains a significant factor, directly impacting the cost of sales in the Hog Production and Fresh Pork segments and influencing raw material costs for Packaged Meats. While hedging strategies and the resizing of Hog Production aim to mitigate this, price swings can still affect margins and cash flow requirements (e.g., margin calls on derivatives).

Geopolitical risks, particularly tariffs, pose a challenge, especially for the Fresh Pork segment which exports to over 30 countries. As of April 29, 2025, exports to China face substantial tariffs (140-172%), potentially limiting access to this market. While China represents only about 3% of total sales, the loss of this outlet can impact overall pork cutout values. Smithfield's strategy to counter this involves leveraging its multiple sales channels and executing a "next best sales strategy" to divert product to alternative domestic and international markets.

A cautious consumer spending environment and the potential for trade-downs to less expensive protein options could pressure Packaged Meats volumes and margins. Smithfield's diverse brand portfolio, spanning various price points, and its strong private label business are key mitigants, allowing the company to retain consumers across different budget levels.

Industry-wide challenges, such as disease outbreaks in hog populations, can impact supply and processing volumes, potentially affecting profitability. Management noted that disease is expected to be an issue for the industry through much of 2025, potentially leading to tighter hog numbers.

Litigation, including ongoing antitrust cases related to price-fixing and wage-fixing, represents a contingent liability ($141 million accrued as of March 30, 2025) and a potential drag on cash flows and liquidity if accruals prove insufficient or unfavorable verdicts occur.

Finally, as a majority-owned subsidiary of WH Group, Smithfield is exposed to potential negative investor sentiment related to U.S.-China relations.

Conclusion

Smithfield Foods has successfully executed a strategic transformation, shifting its focus towards the more stable and profitable packaged meats segment while implementing initiatives to reduce the volatility of its Hog Production operations. The record first quarter 2025 results underscore the effectiveness of this strategy and the benefits of improved market conditions. With a strong brand portfolio, operational efficiencies driven by automation and genetic improvements, a robust balance sheet, and a clear plan for capital allocation and shareholder returns, Smithfield is positioned for continued operating profit expansion. While external factors like commodity price swings, tariffs, and consumer behavior present ongoing risks, the company's integrated model, diversified channels, and focus on cost control provide resilience. For investors, Smithfield represents a protein leader leveraging its scale and operational strengths to navigate dynamic markets and deliver value through strategic growth and disciplined financial management.