Smithfield Foods Q2 2026 Earnings Call Transcript

Quartr
Provided by Quartr
August 11, 2026

Key Takeaways

  • Positive Sentiment: Smithfield reported record second-quarter adjusted operating profit of $300 million, up 2% for the first half to a record $638 million; adjusted EPS rose 13% year over year to $0.62.
  • Positive Sentiment: Packaged Meats showed strong commercial momentum, including a 6.2% increase in points of distribution, 21.7% growth in e-commerce volume, and share gains in major categories such as hot dogs, lunch meat, sausage, and smoked ham.
  • Positive Sentiment: Smithfield highlighted a strong balance sheet and cash generation, ending the quarter with $3.6 billion of liquidity, $1.4 billion in cash, net debt of just 0.4 times adjusted EBITDA, and $204 million of first-half operating cash flow.
  • Negative Sentiment: Management lowered its 2026 outlook, now expecting adjusted operating profit of $1.225 billion to $1.375 billion versus its prior forecast, with sales growth reduced to roughly flat from low single-digit growth.
  • Negative Sentiment: Persistent inflation, cautious consumer spending, higher freight, fuel, packaging, and marketing costs are pressuring volumes and margins; softer hog markets are expected to reduce third-quarter profitability and produce a seasonal hog-production loss in the fourth quarter.
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Earnings Conference Call
Smithfield Foods Q2 2026
00:00 / 00:00

There are 10 speakers on the call.

Operator

Good day, and welcome to the Smithfield Foods second quarter 2026 earnings call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Julie MacMedan, Vice President of Investor Relations. Please go ahead.

Speaker 1

Thank you, operator, and good morning, everyone. Welcome to Smithfield's second quarter 2026 earnings call. Earlier this morning, we announced our results. A copy of the release, along with today's presentation, is available on our investor relations website. Today's presentation contains projections and other forward-looking statements that are being provided pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include all comments reflecting our expectations, assumptions, or beliefs about future events or performance that do not relate solely to historical periods. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to, the factors identified in the release, in our annual report on Form 10-K, our quarterly reports on Form 10-Q, and our other filings with the Securities and Exchange Commission.

Speaker 1

The company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Please refer to our legal disclaimer on slide 2 of the presentation for additional information. Today's presentation will also include certain non-GAAP measures, including, but not limited to, adjusted operating profit and margin, adjusted net income, adjusted earnings per share, and adjusted EBITDA. For a reconciliation of these and other non-GAAP measures to the corresponding GAAP measures, please refer to our earnings press release and our slide presentation on our website. Finally, all references to retail volume and market share are based on Circana MULO+ data. With me this morning are Shane Smith, President and CEO, Mark Hall, CFO, Steve France, President of Packaged Meats, and Donovan Owens, President of North America Pork. I will now turn the discussion over to Shane. Shane?

Speaker 2

Thank you, Julie. Good morning, everyone. I want to start my remarks today by emphasizing the strength of our performance and the resilience of our business. In a cautious consumer and volatile commodity environment, our team delivered record second quarter adjusted operating profit of $300 million, and we expanded adjusted operating profit margin to 8.1% from 7.9%. Through the first half, we set a record for adjusted operating profit of $638 million, up 2% from the prior year. This is a tremendous accomplishment and a clear reflection of the strength, focus, and execution of our teams. I attribute the ability to execute our long-term strategies on two key strengths. One, the advantage of our vertically integrated model, and two, the longevity of experience and cohesiveness of our talented team, resulting in disciplined execution.

Speaker 2

Our vertically integrated model is built on our packaged meats, providing brands, innovation, and resilience through pricing diversity. Fresh pork, creating value by turning every pound into its highest and best use domestically and globally. Hog production, which establishes the foundation through an assured supply of quality raw material and cost control that no non-integrated peer can match. Smithfield is celebrating its 90th anniversary this year. Our company was built through acquisitions and organic growth and has succeeded by executing our proven strategies despite hard-fought challenges. Coincidentally, the people on this call today, Mark, Steve, Donovan, and I, have 90 years of combined experience, and we are supported by teams who execute with urgency and discipline every day.

Speaker 2

No matter what the challenge or disruption in the macroeconomic environment, it is embedded in the culture of Smithfield and the DNA of our people to always look for ways to drive efficiency, optimize our business, and execute with discipline and urgency. Looking at each segment for the second quarter, Packaged Meats delivered strong adjusted operating profit margin of 13.1%. We defended our market share in a difficult retail environment. We delivered meaningful volume share gains in our largest product categories, outperformed category trends in both brick and mortar and e-commerce, expanded distribution, and continued to see strong results from our mix shift strategies. Fresh Pork operating profit reflected significant industry gross market spread compression versus the second quarter of 2025. Importantly, our team continued to create value by growing sales in our higher margin value-added retail, pharmaceutical, and pet food channels.

Speaker 2

Hog production delivered higher operating profit, driven by higher hog selling prices, as well as savings and improved operating efficiency on our retained farms. This marked the sixth consecutive quarter of hog production segment profitability and underscores the ongoing benefits from our transformational strategy. In summary, we delivered record second quarter and first half adjusted operating profit despite a challenging macroeconomic environment. Our record results continued to bolster our already rock-solid financial position. Having a healthy balance sheet has long been a priority for Smithfield because it insulates us from the challenging market conditions and gives us significant flexibility to support our growth strategies and deliver shareholder value over the long term. Our first half results demonstrate the strength of our team, the resilience of our model, and the durability of our strategy. Consumers continue to face pressure from persistent inflation across a variety of household spending categories.

Speaker 2

As a result, value-seeking behaviors have remained elevated, contributing to softer demand trends. As we look to the remainder of 2026, we are focused on managing through a consumer spending environment that continues to pressure volumes across the industry while using our brand strength, portfolio breadth, and execution capabilities to keep winning with consumers. We are also navigating softer meat and hog markets in our upstream businesses with the benefit of our integrated model, disciplined risk management, and continued focus on operational efficiency. On the call side, we are expecting continued volatility and inflationary inputs such as fuel and freight throughout 2026. Based on what we know today, we believe it is appropriate to update our 2026 outlook to reflect the current macroeconomic backdrop while continuing to invest in the strategies that position Smithfield for long-term growth. Mark will share more detail of our outlook by segment during his remarks.

Speaker 2

I'll spend the rest of my remarks talking about our strategies to win in the second half and over the long term. First, our strategies and competitive advantages remain the same. In packaged meats, we will improve profitability through mix, volume growth, and innovation, leveraging our branded and private label pricing portfolio. In fresh pork, we will maximize the net realizable value of every hog across channels at a best-in-class cost structure. In hog production, we will achieve best-in-class cost structure through genetic transformation, herd health improvements, and procurement and nutrition savings. In operations, we will drive efficiencies across manufacturing, supply chain, distribution, procurement, and SG&A. In M&A, we will continue to evaluate synergistic opportunities. In packaged meats, we gained volume share in five of our $1 billion-plus categories: cooked dinner sausage, dry sausage, hot dogs, packaged lunch meat, and smoked ham.

Speaker 2

A key contributor to our volume share growth in the second quarter was winning during grilling season. We won with new innovative flavors like Smithfield Pabst Blue Ribbon Beer Brats, Nathan's Famous Grass-Fed Beef Franks, and Eckrich Andouille Smoked Sausage. During the second quarter, our Eckrich brand, which markets popular grilling items such as dinner sausages, grew households by 1.7% and gained 0.7 points of volume share, reflecting strong advertising support and new flavor innovation. We continue to improve our mix of higher margin, higher velocity items. For example, instead of just reaching one household with a large spiral ham during the holidays, we are converting that single ham and dining occasion into the equivalent of up to 14 everyday products with higher profitability, increasing frequency, velocity, and profitability.

Speaker 2

For example, with packaged lunch meat, we are bringing consumers back to the category through premium quality offerings that elevate the traditional lunch meat experience. By delivering differentiated products that meet consumers' growing expectations for quality and freshness, we are helping drive traffic back to a high-volume area of the store while creating a compelling trade-up opportunity. This is a win for both retailers and consumers, and it is fueling growth while expanding our distribution footprint. A key contributor to this momentum is our Smithfield Prime Fresh brand. In the second quarter, Smithfield Prime Fresh volume increased 18.4%, supported by a 24.3% increase in our points of distribution. Beyond expanding distribution, we are increasing our presence within stores by adding new SKUs, including our Smithfield Prime Fresh pepperoni and salami.

Speaker 2

In addition to Smithfield Prime Fresh, we offer branded packaged lunch meat across the value spectrum, starting with value brands like Gwaltney, Armour, and John Morrell to mainstream brands Smithfield, Eckrich, Farmer John, and Krakus, delivering more affordable options for consumers. As a result, during the second quarter, we grew branded packaged lunch meat volume by 9.5% and gained 1.1 points of volume share. We have a strong private label business should customers choose that option. Innovation and how we bring products to market is where our brand strategy is evolving most. I want to spend a moment here because it speaks to how we are building the next generation of Smithfield consumers. On May 1st, Nathan's Famous successfully expanded its iconic 100% beef portfolio with the launch of Nathan's Famous Grass-Fed Beef Franks, bringing a compelling premium offering to the category.

Speaker 2

Nathan's Grass-Fed Hot Dogs finished the quarter as the number one grass-fed hot dog in the country, already above 40% ACV. A very strong distribution build for a new item and still expanding. More than half of younger consumers now follow a high-protein diet, and they are demanding cleaner, premium-sourced options. Grass-fed fits directly on that trend. It is a premium protein-forward product built for today's consumer. Our go-to-market strategy for Nathan's Grass-Fed is different than in the past. To reach that younger consumer, we are allocating brand dollars toward digital platforms rather than toward traditional media alone. Including a social media activation featuring four of the Savannah Bananas players, our Nathan's Grass-Fed launch campaign generated nearly 2 billion earned media impressions, demonstrating Nathan's ability to generate outsized attention and amplify marketing investment.

Speaker 2

This is representative of a broader shift in how we build brands, lead with entertainment and organic engagement to earn attention, then convert that attention into trial, velocity, and share. It is working. We grew Gen Z dollars 15.2% over the last 52 weeks. We are quite deliberately building the consumer franchise of the next decade, not just defending the shelf today. This marketing investment to support the launch of Nathan's Grass-Fed Hot Dogs is part of our overall increased investment behind our brands this year. I want to be explicit about that investment because it is central to our second half story. We are increasing advertising and promotion spend this year, and we are weighting it toward the second half. This is a deliberate shift toward long-term brand building alongside near-term traffic-driving activity.

Speaker 2

In a market where consumers are scrutinizing every dollar, relevance is what earns the branded purchase over private label, and relevance is what we are buying. For the Smithfield brand, since the launch of our We Speak Pork campaign late last year, we have seen under 40 consumer base grow by 3% versus the prior year. We have also grown household penetration with younger millennials by 0.4 points and with Gen X under 55 by 1.3 points. As part of our promotional strategy, we are stepping up our investment in e-commerce to help consumers more easily discover our products as they shop online. Today's grocery shopper moves seamlessly between online discovery and the physical shelf, and the brand that wins the digital shelf increasingly wins the cart. Our efforts are generating returns.

Speaker 2

During the second quarter, we grew our e-commerce volume share in 22 of our 25 categories, increasing our total e-commerce volume by 21.7% and outpacing the industry. The point to take away is digital discovery drives trial drives velocity, and velocity earns us distribution, which is why our points of distribution were up 6.2% this quarter compared to the second quarter of 2025. That is the engine, and we are investing to accelerate it in the second half with more omni-channel promotion and advertising behind our national brands, Smithfield, Eckrich, and Nathan's Famous. Food service is also an important channel for packaged meats at roughly 30% of our sales. Our commitment to quality, innovation, and versatility positions us as a leader in food service. For example, during the first half, we helped our customers drive traffic with the introduction of 31 new limited-time offers.

Speaker 2

Several of these have been added to permanent menus. Like grocery food service, consumer spending has been challenged this year, but we outperformed the category, with first half food service channel sales increasing by 1%. As we look at the second half, we feel good about our packaged meats momentum and our market strategies. We are increasing distribution, we are growing e-commerce share, we are launching new premium items, and our marketing programs are working. Moving on to our second core growth strategy, growing fresh pork profitability. We are focused on maximizing the net realizable value of each hog across channels and continuing to improve operating efficiencies and optimize our harvest. This strategy served us well during the second quarter.

Speaker 2

In the face of difficult market conditions with unfavorable industry market spread compression year-over-year, we were able to offset more than half of that headwind through better sales margins, driven by maximizing the net realizable value across channels and through continued operating efficiencies in our plants. During the second quarter, we grew value-added case-ready and marinated volume by 4%. Contributing to that growth was our April launch of Smithfield Meal Ready Cuts, which are sliced, marinated, and premium pork cuts that deliver globally inspired flavor in minutes. Food service was another bright spot for fresh pork. During the second quarter, we grew fresh pork food service channel sales by 12% and volumes by 8%, with strong sale of ribs, which are a great alternative to more expensive beef.

Speaker 2

Our fresh pork team also executed our next best sale strategy with strong sales to the higher-margin pharmaceutical, pet food, and export channels. Looking forward, we remain focused on growing higher-margin, value-added, case-ready, and marinated offerings, meeting strong demand for nutritious protein at a great value relative to beef, and expanding pork's relevance across multiple cuisines and usage occasions. The team continues to drive automation, yield optimization, SG&A, and supply chain savings towards a best-in-class cost structure. Now to our strategy to optimize hog production. Second quarter 2026 hog production profit of $64 million marked a $42 million increase from a year ago due to favorable hog sales prices and continued operating discipline. As we look to the second half, we are pleased with our team's execution on operating at a best-in-class cost structure. Our segment results will be largely driven by market prices for hogs.

Speaker 2

Over the medium term, we continue to progress toward our goal of producing approximately 30% of our fresh pork needs internally. We believe this will provide an optimal balance of assured supply and cost risk management and will continue to improve earnings durability across the cycle. In today's challenging environment, it's never been more important to have a culture of continuous improvement. Across the organization, we are securing yield improvement and operational and supply chain savings that are helping us offset some of the inflationary headwinds impacting our business. We are deploying technology to improve efficiency, lower costs, and redeploy talent to higher-value activities. Our continued investment in improving supply chain operations and simplifying our transportation strategy is helping us navigate some of the near-term inflation in transportation costs. And we are investing in our future with our new Sioux Falls processing plant.

Speaker 2

This plant will be the most modern, efficient, and largest combined fresh pork and packaged meats processing plant in our network. While final approval is still pending, we are taking the necessary steps to prepare for the new build. Finally, we continue to evaluate opportunistic M&A to support our growth strategies. We continue to anticipate closing the Nathan's Famous transaction in the second half of 2026, subject to CFIUS review and other customary closing conditions. Successfully closing the acquisition will secure our rights to the brand for the long term, and we are looking forward to maximizing Nathan's Famous brand growth across retail and food service. As I noted earlier, our strong financial position provides us the flexibility to support our growth strategies. In summary, we delivered record second quarter and first half results despite a challenging environment.

Speaker 2

Our performance demonstrates the strength and resilience of our vertically integrated model and disciplined execution across our organization. While persistent inflationary pressures continue to influence consumer demand and input cost, we are approaching the balance of the year with discipline, confidence, and a clear plan. We remain focused on executing our strategies, driving operational efficiencies, investing in our brands, and delivering long-term value for shareholders. Supported by our strong balance sheet, we believe we are well-positioned to navigate the current environment and drive growth over the long term. With that, I will turn it over to Mark to review our financials in more detail and walk you through our second half outlook.

Speaker 3

Thanks, Shane, and good morning to everyone joining the call. I want to reiterate Shane's comments about the disciplined execution by our experienced team that drove record second quarter and first half adjusted operating profit. Our balance sheet is strong, and we are generating solid cash flow. That gives us the flexibility to manage through today's environment, invest in organic growth, M&A, and return value to shareholders. Turning now to our second quarter results. Consolidated sales in the second quarter were $3.7 billion, which was a 2.3% decrease compared to the prior year. However, excluding non-recurring sales to establish the hog production joint ventures last year, total company sales would have been essentially flat versus a year ago. We delivered adjusted operating profit of $300 million, which set a new second-quarter record. Adjusted operating profit margin expanded by 20 basis points to 8.1% from 7.9% last year.

Speaker 3

Adjusted net income was also a record $245 million, up 13% from $217 million in the second quarter of 2025. Adjusted diluted EPS of $0.62 per share increased 13% compared to $0.55 per share in the second quarter of 2025. Next, looking at our second quarter segment results, starting with packaged meats. Packaged meat sales of $2 billion decreased by 2.7%. Volumes were down 5.5%, primarily reflecting the earlier Easter timing this year and were partially offset by a 2.9% increase in the average sales price. For the first six months of 2026, despite the challenging external environment, packaged meats volumes were down just 1%. Our packaged meat segment delivered operating profit of $265 million, which was down $31 million from adjusted operating profit last year. Our operating profit margin was strong at 13.1%, but was down 110 basis points versus the prior year.

Speaker 3

We are able to more than offset higher raw material costs through pricing and mix. However, our margins were unfavorably impacted by higher freight and diesel costs, as well as our increased investment in marketing, which is an important strategic driver for our brands over the long term. Switching to fresh pork, segment sales of $2 billion decreased 3.5% year-over-year. This was driven by volume down 2% on fewer hogs processed, as well as lower average sales prices of 1.5%, which compared favorably to the 5.3% decline in the USDA cutout as a result of our next best sales strategy. Fresh pork delivered operating profit of $14 million at a 0.7% margin. This was down from adjusted operating profit of $30 million and an adjusted operating profit margin of 1.4% in the second quarter of 2025. The year-over-year decline was primarily driven by $37 million of industry market spread compression.

Speaker 3

We offset $21 million of that pressure through our next best sales strategy and continued operating efficiencies. Looking at hog production, segment sales of $772 million decreased 8.2% year-over-year. Excluding the one-time initial sale of inventory to our hog production joint ventures last year, sales would have increased due to a 9% increase in the average selling price for hogs, inclusive of the effects of hedging. Hog production delivered operating profit of $64 million, up from $22 million last year, driven by higher hog selling prices, savings on our nutritional plan and improved operating efficiency on our retained farms. Taking these segment results together, the broader point is that we continue to generate strong earnings and cash flow while maintaining a very healthy financial position.

Speaker 3

At the end of the second quarter, our net debt to adjusted EBITDA ratio was 0.4 times, well below our policy of less than two times. We also ended the quarter with very strong liquidity of $3.6 billion, including $1.4 billion in cash and cash equivalents, comfortably above our $1 billion policy threshold. We generated $204 million of operating cash flow in the first half, nearly double the $108 million generated in the same period last year. On a trailing 12-month basis, operating cash flow exceeded $1.1 billion, underscoring the strong cash conversion of the business. That cash generation gives us the flexibility to continue funding our growth priorities, invest behind the business and return capital to shareholders while maintaining a strong financial position.

Speaker 3

Capital expenditures were $165 million in the first half, compared to $158 million in the same period last year, with more than half of our planned capital investments focused on projects designed to support both top and bottom-line growth. At the same time, we continue to return value to shareholders. We recently declared our third dividend this year, and subject to the board's discretion, we expect to pay $1.25 per share in annual dividends. As Shane Smith said, we delivered a record first half supported by strong execution, a resilient business model, and a very healthy financial position. At the same time, the external environment has become more challenging as we look across the balance of the year. That is why we're updating our 2026 outlook, primarily to reflect softer commodity market assumptions, especially in hog production and to a lesser extent, fresh pork.

Speaker 3

In packaged meats, we are also planning around a cautious consumer and continued inflationary pressure on both demand and input costs. Given those dynamics, we believe it is prudent to moderate our outlook across each of our three main segments. Importantly, this is not a change in how we view the strength of our brands, our strategy, or the long-term trajectory of the business. We know how to manage through this environment, and we have a clear plan. In packaged meats, our brands, including Smithfield, Eckrich, and Nathan's, continue to connect with consumers. We will build on that momentum in the second half by increasing brand advertising and omni-channel marketing, continuing to innovate, expanding distribution, and using our strong private label position to meet the needs of today's value-seeking shopper.

Speaker 3

Across fresh pork, hog production, and our corporate functions, we will stay focused on what we can control, driving efficiency, managing costs, and executing with discipline. Turning now to the directional cadence for the third and fourth quarters. For the third quarter, which historically is our softest from a profit standpoint, we are planning with discipline around the persistent external factors I just mentioned, while continuing to execute the initiatives that are gaining traction across the business. Importantly, even with a more challenging commodity backdrop, we expect packaged meats to remain highly profitable and continue to be the primary earnings engine of the company. We expect third quarter packaged meats adjusted operating profit to be up slightly year-over-year, but that increase will be more than offset by lower fresh pork and hog production profitability due to softer markets. This will result in third quarter profitability down sequentially from the second quarter.

Speaker 3

We do, however, expect to deliver solid year-over-year growth in our seasonally strong fourth quarter, led by growth in packaged meats. Packaged meats adjusted operating profit growth will be driven by four specific factors. First, increasing benefits from expanded distribution at retail into our seasonally largest quarter. Second, the velocity impact of our stepped-up second half marketing behind e-commerce as well as Nathan's, Eckrich, and Smithfield. Third, continued mix shift into higher margin, higher velocity items. Fourth, a benefit from the 53rd week. For fresh pork, we anticipate continued pressure from the industry gross market spread in the third quarter, but we expect a strong fourth quarter growth driven by seasonal profitability rotation to fresh pork from hog production and continued execution on our next best sale and cost optimization strategies.

Speaker 3

For hog production, based on lower hog prices, we now expect a sequential deceleration from the second quarter to the third quarter. We also anticipate a return to more seasonal norms in the fourth quarter, with an expected loss for this segment. Putting that together, updated full year 2026 adjusted operating profit outlook is as follows. Total company adjusted operating profit is now expected to be in the range of $1.225 billion to $1.375 billion. Packaged meats is now expected to be in the range of $1.075 billion to $1.15 billion. Fresh pork is now expected to be in the range of $180 million to $240 million, and hog production is now expected to be in the range of $75 million to $125 million.

Speaker 3

Importantly, this outlook does not change how we view the strength of our brands, the direction of our strategy, or the long-term earnings power of the business. We are also updating our total company sales outlook to roughly flat versus our prior expectation of low single-digit growth, reflecting the more cautious consumer spending environment. At the same time, we have a clear action plan. We are focused on execution, operational excellence, supply chain discipline, and cost control across the company, emerging from this environment stronger, more efficient, and even more relevant to consumers. Looking beyond the near term, we remain confident in our long-term value creation algorithm. Our strong balance sheet, liquidity, and cash flow give us the flexibility to keep investing behind our strategy, strengthen the business, and return value to shareholders in line with our capital allocation framework.

Speaker 3

Taken together, we are confident in our ability to execute through the current environment, protect margins, and deliver on our updated outlook for 2026 while continuing to build momentum for the long term. Now, I will ask that the operator open the call for Q&A. Operator?

Operator

Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Leah Jordan with Goldman Sachs. Please go ahead.

Speaker 4

Hi, Shane and Mark. Good morning, and thanks for the update today. Maybe I will just start out on the top line, given the lower sales outlook and the comments around softer demand trends. Just seeing if you could provide more detail on how we should think about price versus volume as top-line drivers for both packaged meats and fresh pork in the back half. Then really just tying into that, just more color on what you are seeing on the demand side. I know you have a range of price points across your portfolio. So what are you seeing in terms of trade in and out across your brands? Thank you.

Speaker 3

Good morning, Leah. Thanks for the question. Steve, do you want to take that one?

Speaker 5

Sure. Good morning, Leah. Again, thank you for the question. First of all, I will start out really talking about the consumer. I would say that what we are seeing is really pretty consistent with what you are hearing across the broader food industry. As you know, the consumer is still showing some pressure. Gas prices have moved up again, and household budgets certainly remain tight. Lower-income consumers, of course, are being very intentional about how they spend their money. I would say, frankly, even higher-income households are acting a little bit more carefully than they did a few years ago, which is a change that we are dealing with this year. The reality is, consumers have not stopped buying food. Even though they have become a lot more selective, obviously they are looking for value and they are looking for versatility.

Speaker 5

For us, that is actually where we feel pretty good about our position. The key part is protein remains a priority for not only the families, and our job is to make sure that we are giving consumers options that really fit that budget. Whether it is branded or value or private label, and you have heard us talk about that theme several times, our job is to make sure we have the right product to fit that consumer need. We have also been very focused on leaning into innovation that delivers on value, especially in today's environment. When you think about some of the new products that we have recently introduced, you think about the Armour LunchMakers items. We introduced the loaded nachos. We also have a zoo animal chicken nuggets.

Speaker 5

Those are all good examples because the key about those products is they are on trend, they are fun, but they are also affordable solutions for families, which is really the key part. When you think about that line of our products that we have within LunchMakers, the key difference is that we are offering a product at roughly half, and again, half the average price point of the broader category. To me, that is a very compelling value proposition, certainly in today's environment. At the end, I would say, as you know, consumers are certainly cautious, but the key part is they are still spending money and they are still buying protein, which is key for our business.

Speaker 5

They are still looking for convenient meal solutions, which is a big focus, not only on some of the current items we have rolled out, but also some of the future innovation that we are going to be bringing to the market. I would say that we are winning with the consumer. That is why if you look at some of the category data, we have increased percent of households buying our products in 11 of our brands. It is not that we are just winning one or two brands or one or two categories. That is 11 of our brands, we are increasing the household penetration. The reality is we feel that we are well-positioned long term because of the breadth of our portfolio. Again, it is not just one category, one brand that is winning. We see that across the board.

Speaker 4

Okay, that is helpful. Thank you. Following up to Mark Hall's comments in the prepared remarks around packaged meats profitability, it sounds like we will get a little bit recovery here in the third quarter and even more in the fourth quarter. I know you highlighted a bunch of drivers there, but maybe just some more detail around the puts and takes as we move through the year. I understand freight will be higher, but maybe some more detail around some of the other input costs in that segment as well and the timing of flow-through given inventory turns there. Thank you.

Speaker 3

Leah, I would say, relative to the call down that we had in guidance for packaged meats, it is really reflective of what we had in the first half in terms of the input costs. We faced elevated input costs relative to raw materials, fuel, freight, and resin-based packaging. There is a little bit of spillover of that into the second half. Those factors alone with our investment in our brands really drove segment profit in the first half down by almost $30 million. It takes time for pricing and other mitigation efforts for us to catch up. As we talked about, we are looking for a strong second half in packaged meats and particularly in the fourth quarter. I think raw materials, particularly in pork, should be an expected tailwind in the second half.

Speaker 3

We are going to continue to invest in our brands and expect that we will continue to see elevated fuel, freight, and packaging costs, but we are going to continue with our mitigation strategies. We expect that volume and price and mix improvements will be strong. As I mentioned, Q3 is seasonally the low water mark for packaged meats profitability. We expect a really solid fourth quarter and year-over-year improvements in packaged meats profitability and margins.

Speaker 4

That's very helpful. Thank you.

Operator

Thank you. The next question comes from Peter Galbo with Bank of America. Please go ahead.

Speaker 6

Hey, good morning, guys. Thanks for the questions. Mark, if I could pick up on that, please, on packaged meats. I think the call down is somewhere between $35 million and $40 million at the midpoint. I think the first half kind of came in, I don't know, more or less in line from a profit standpoint with your expectations. I am trying to reconcile again, if pork's going to be a tailwind in the second half, just given what we can see in the cutout. I know you have all the other spend items, but what's the tailwind on pork, I guess, in dollar terms for the back half relative to the inflation and the marketing spend?

Speaker 6

Because again, I think it's really hard to reconcile where the $40 million-ish call down in the back half would be given what we can kind of see in the third-party data. Just any helping pieces on the bridge there would be appreciated.

Speaker 3

Yeah. Peter, I would say if you look year-over-year in the first half with packaged meats, we were down roughly $30 million. We started off the year a little bit behind the eight ball in terms of catching up on the higher input costs. Again, it takes time for the pricing actions to take effect, whether it's raw materials or what we're seeing in the transportation arena. That kind of shifted that profit profile increased into the second half of the year. Again, the third quarter is typically the softest for packaged meats. But we're expecting to have solid performance in the fourth quarter with some of those tailwinds that you mentioned in terms of the raw material side of the business. But we're going to continue to be chasing to a certain extent, the higher transportation costs that are across the industry.

Speaker 3

On balance, that's really the reason for the call down.

Speaker 6

Okay.

Speaker 3

I can throw it over to Steve for a-

Speaker 6

Sorry, go ahead. Go ahead, Steve. Sorry, I didn't mean to interrupt.

Speaker 5

Yeah. Peter, again, thank you for the question. I will just add to what Mark Hall is saying is, to me, we are looking for a very strong back half of the year, and Mark Hall has kind of walked through the quarters between Q3 and Q4. I think what is important to think about is that at a really high level, we feel good about where the business is coming out after the first half. It certainly has not been easy environment. Obviously, I already walked through what we are seeing from the consumer and how they are dealing with some of these cost pressures, but also some of the additional cost pressures from a supply chain standpoint that Mark Hall was referencing. I would say the biggest thing to really think about for the back half of this year is distribution.

Speaker 3

We expanded our points of distribution by that 6.2% during the quarter, and that is really broad-based again. It is not just one brand or one category. It is broad-based across our categories. When you think about some of the items that we have highlighted several times, Smithfield Prime Fresh, we continue to grow that business and grow that distribution. That is because of some of the innovation that we have. It is growing the base business that we have, but the innovation on Smithfield Prime Fresh, it is new items that we brought to the category and also new packaging options that will be coming out. The other key one is you think about some of the consumers that we are reaching out to with some of the new consumers and some of the new products, like the Nathan's Famous Grass-Fed Beef Franks that Shane Smith was talking about.

Speaker 3

That product came to market in May, and in a very short amount of time, that became the number one grass-fed beef hot dog in the whole category. Of course, dry sausage continues to be a big item for us. Really, when you think about your question for the back half, we are well-positioned for the back half, and I would say a lot of that is tied to the distribution that we picked up. Because if you think about Q2, we picked up this volume in Q2.

Speaker 5

Even though we saw a little bit of the benefit of the new distribution in Q2, where we really start to see that is going to be in the back half of the year, and that is why we are confident in what we are looking at for the back half of the year.

Speaker 6

Okay. Thanks for that. Mark, on hog production, I think you gave some color on the cadence for the back half of the year. Again, I think in some of the data, it would suggest, July was probably looked similar, and Q3 maybe is a little bit of a step down. But on the whole, it seems okay. Maybe you can just talk a little bit about just how you are hedged for the rest of the year on hog production, and then anything you can do just to put some guardrails around the magnitude of the loss we might expect in Q4, again, given it is seasonal, but just how negative we could potentially think about that being. Thanks very much.

Speaker 7

Yeah. So again, the reduction is really driven by commodity pricing assumptions rather than anything operationally related within hog production. Last year, hog production benefited from unusually strong prices in the third and fourth quarter. Taking a look at the current lean hog futures curve implies prices that are going to be 3%-8% below 2025 levels. Actually, the fourth quarter right now is about 13% below the prior year. So again, if you take a look at just the basic crush model based on the USDA, or excuse me, the CME and the Iowa State model, you are looking at losses of about $20 a head in the fourth quarter. Again, we will continue to outperform that, but directionally, we are returning to more of those seasonal norms that we have seen with losses in the first quarter and in the fourth quarter.

Speaker 7

But I would say operationally, we are very pleased with the performance on our farms, and we have generated six consecutive profitable quarters, and we continue to improve herd health, feed conversion, and overall cost structure. So we are happy with how the farms are performing on the underlying basis.

Speaker 6

Okay. Thanks for that, guys.

Operator

Thank you. The next question comes from Ryan Lavin with Barclays. Please go ahead.

Speaker 8

Hey, thanks for the time for questions. This is Ryan on for Ben today. First, going back to packaged meats a little bit and digging a little bit more into pricing, the big emphasis is the softer consumer. How are you as a team feeling about pricing and potentially leaning into more trade downs, potentially trying to really the balance of keeping market share while also trying to price out some of your inputs as those price increases come online? Then a quick follow-up after that.

Speaker 5

Sure. This is Steve. I will take a stab at that question. When we look at the competitive environment today, I would say the biggest change versus a year ago is that most of the industry has actually become less promotional. What we are seeing is fewer features, fewer displays, and really less aggressive activity across many of the categories where we compete. What has also become clear to us is that consumers are not responding to discounts alone. Promotional velocity has softened across much of the industry, which tells us spending more trade dollars in running deeper deals really is not the answer. We do think that that really plays into our strength. Rather than chasing volume through incremental discounting, we have remained focused on quality merchandising, strong innovation and brand support.

Speaker 5

When you think about quality merchandising, that is where we believe is the most effective way to really connect with consumers in store. More importantly, I think retailers are responding. I say that because, as I mentioned when I was talking to Peter, that they are responding because we have picked up new distribution. They see that our brands and the promotional strategy and the support, the marketing support that we are putting behind our brands is working, and that is why we are being rewarded with additional distribution. I would say that distribution that we are gaining, it is not because of lower pricing. It is really being earned through the innovation and also the investments that we are making.

Speaker 5

Obviously, we talked about the Nathan's and the grass-fed and Prime Fresh, but we also have some of our core brands and established brands like Eckrich, where we're not only gaining on our base business that we have, but we've also added innovation to the Eckrich brand that we're picking up new distribution. I would say the second half, our confidence it really comes less from promotional environment, and it's more about the fact that we've already put the growth drivers in place. We have more distribution, more shelf presence, stronger marketing, and innovation that continues to gain traction with both consumers and retailers. When we look at that promotional environment, we feel that we're in a really good place with the brands that we have and the new distribution that we've picked up.

Speaker 8

Thanks. That's a good color. A quick follow-up on hog production. Is there any risk that all the headwinds you talked about with the softer commodity pricing and the input cost changes farmer decisions across the space and shifts the supply-demand balance?

Speaker 7

Yeah, Ryan, I think when you look at hog production, I think it's always important to start with what's happening out there, right? You look at the July USDA updated its fourth forecast to be up 1.4%. That's down from the 2.5% that they had previously reported. You look at things like the breeding herd down 1.2%, the farrowing intentions down 2%. You couple that with things that we see, for example, industry slaughter being down over the last several weeks and the cash market staying strong. You couple those things together, and it points to what could be a hole in the production or in the supply of hogs coming to market, which would lead to higher prices in the third and fourth quarter.

Speaker 2

As Mark said, when we look at our guidance and our ranges, we use the futures market as kind of that foundational piece to come up with those. I do believe personally, as we think about those things, there is some upside that could come into the third and fourth quarters.

Speaker 8

Perfect. Appreciate the color. I will pass it on.

Operator

Thank you. The next question comes from Thomas Palmer with Heather Jones Research. Please go ahead.

Speaker 9

Good morning. This is Tom on for Heather. Thanks for taking the question. Could you speak to any potential drivers of the weakness in hams? We have been seeing down 20% or so in the just past two weeks or so. Perhaps hearing some labor issues there. Thank you.

Speaker 2

Yeah. Donovan, do you want to talk to the ham markets?

Speaker 7

Yeah. Thomas, thanks. We have seen a value deflation in the ham recently. I think there's a lot of rumors out in the industry. You just mentioned one of them. We certainly don't have any labor issues within our company, so we're fully converting. I think there might be a couple things in the industry in the Midwest that could be driving it, but it'd be pure speculation. I think the foundation of what you need to look at is really Mexico is going to drive our valuation on hams in the U.S. Demand is very good in Mexico, but I think worldwide there's a demand deflation, if you will, or there's increased supply that's causing some issues with the ham market in general.

Speaker 7

It's allowing Mexico to pick up some hams on the world stage a little bit cheaper than last year where we had the ham market at in the U.S. Albeit demand, I think, is very strong. Yeah, we're seeing a little bit of deflation, but I do think that that will rebound here as we continue towards the holidays.

Speaker 9

Appreciate the color. I'll pass it on.

Operator

Thank you. This concludes our question and answer session. I would like to turn the conference back over to President and CEO, Shane Smith, for closing remarks.

Speaker 2

Thank you. Thanks to everyone who joined the call today. Our experienced team is executing our strategies that position us well to navigate the dynamic external environment. We are making disciplined investments to support our long-term growth and increase our value for our shareholders over time. We look forward to updating you on our progress following the third quarter results. Thank you all for joining.

Operator

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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