When Smithfield Foods waddles up to the trough, the other porkers stand aside. Fat from acquisitions, the company is the world's largest hog producer and pork processor. Its products include 50-plus brands of fresh pork and processed, value-added pork products including deli meats and prepared foods. Smithfield Foods sells its products under such brand names as Armour, Eckrich, Cook's, Farmland, John Morrell, Patrick Cudahy, Gwaltney, and Healthy Ones. Smithfield distributes its meats in the US and abroad, mainly in Mexico, Poland, Romania, and Western Europe. Founded in 1936 as The Smithfield Packing Co., the company was acquired in 2013 by China's largest meat producer, Shuanghui International.
Change in Company Type
The takeover is the largest to date of a US company by a Chinese firm. In September 2013 Smithfield and Shuanghui combined their operations in a deal valued at approximately $7.1 billion, including the assumption of Smithfield's debt. Hong Kong-based Shuanghui International is the majority shareholder of Henan Shuanghui Investment & Development Co., which is China's biggest pork producer. The deal has raised concerns in the US over food safety and security. Smithfield expects the deal to increase exports of its pork products to China.
Virginia-based Smithfield rings up nearly 80% of its sales in the US. The international business, which extends to a dozen countries overall, is comprised mainly is the company's meat processing and distribution operations in Poland, Romania, and the UK, as well as its interests in meat processing operations, mainly in Western Europe and Mexico. China, where pork consumption is increasing along with a growing middle class, presents a major growth opportunity for Smithfield.
The company has five reportable segments: Fresh Pork, Packaged Meats, Hog Production, International and Corporate.
The Fresh Pork segment consists of Smithfield's US fresh pork operations. In 2014, export sales accounted for 23% of the Fresh Pork segment’s volumes and 27% of its revenues.
The Packaged Meats segment consists of US packaged meats operations. In 2014, export sales comprised 3% of the Packaged Meats segment’s volumes and 3% of the segment’s revenues.
The Hog Production segment covers the company's US hog production operations.
The International segment is comprised of meat processing and distribution operations in Poland, Romania and the UK, stakes in meat processing operations (mainly in Western Europe and Mexico), Smithfield's hog production operations in Poland and Romania and its interests in hog production plants in Mexico. International meat processing operations include a 37% stake in Campofrío Food Group (CFG), a leading Spain-based packaged meats company with annual sales of $2.6 billion.
The Corporate segment provides management and administrative services to support Smithfield's other segments.
Sales and Marketing
The company uses a private fleet of leased tractor trailers and independent common carriers and owner operators to distribute live hogs and meat products to its customers, and to move raw materials between plants for further processing. In 2014 Smithfield sold its products to 3,200 customers. That year the company’s ten largest customers accounted for 27% of net sales.
Following its takeover by Shuanghui the company's financials reflect the results of both companies. In 2014 Smithfield posted revenues of $15.03 billion primarily as a result of higher domestic pork market prices.
Gross profit increased as a result of higher average selling prices and lower hog raising costs, which more than offset the increase in pork processing raw material costs. In 2014 the company posted net income of $556.1 million thanks to higher revenues and income from equity method investments, partially offset by higher income tax expenses.
It posted cash inflow of $813.1 million in 2014 due to higher net income and a change in working capital.
Smithfield is attempting to boost sales by placing more emphasis on the production of higher-margin precooked meats and entrees. However, the company is still in a commodity business, and low hog prices can depress earnings. Frustrated investors, looking for ways to better predict the ebbs and flows of Smithfield's sales, have urged the pork producer to rely less on derivative bets it has made on the futures market. The recent takeover of the company by Shuanghui International advances Smithfield's goal of further penetrating the vast Chinese market. (China is a leading consumer of pork.)
The pork giant has identified 12 major brand names on which it plans to focus its attention. It improve its annual profitability by about $90 million in 2014 and anticipates its packaged meats business, which accounted for 56% of fiscal 2013 sales, will maintain its solid profitability. Though in past years Smithfield was getting fat on acquisitions, recently the pork provider has been concentrating on shedding excess weight. The company restructured its pork segment by consolidating numerous independent operating companies into three regional ones and shuttered half a dozen packaged meats plants and one fresh pork plant that had been deemed inefficient and underutilized. This effort also included consolidating its sales organization.
Mergers and Acquisitions
In pursuit of its strategy to acquire modest-sized companies that can easily be integrated into its existing business, Smithfield in May 2013 acquired a 50% stake in Kansas City Sausage Company, a leading US sausage and sow processor, for $35 million in cash. The purchase provides a growth opportunity in two key packaged meats categories -- breakfast sausage and dinner sausage -- and allows Smithfield to expand its sausage menu.