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Smithfield Sees Profits Return

by 5m Editor
12 March 2010, at 10:18a.m.

US - US meat and pig meat processing giant, Smithfield Foods has reported income for the third quarter of the 2010 financial year of $37.3 million, compared to a loss last year of $108.1 million.

Sales were $2.9 billion compared to $3.3 billion in the same period last year.

The third quarter of the 2010 financial year consisted of 13 weeks compared to 14 weeks in 2009.

The company said that the current quarterly results include a number of significant items, including pre-tax impairment and Pork segment restructuring charges totaling $16.9 million, Campofrio Food Group debt restructuring and discontinued operations charges of $11.7 million, and the income tax impacts of certain discrete items.

Last year's results also included a number of significant items, including gains on the sale of the company's Groupe Smithfield investment and early extinguishment of debt, Pork segment restructuring charges, cattle inventory write-downs, and a mark-to-market adjustment for hog production hedges. Excluding these items, the prior year loss from continuing operations would have been $24.0 million, or $(.17) per diluted share.

"The third quarter demonstrated the ongoing strength of our packaged meats business, which continues to deliver very strong margins. We are extremely focused on this part of the business, it is paying dividends and the restructuring program is beginning to have an impact," said C. Larry Pope, president and chief executive officer.

"The action items called for in the Pork Group restructuring plan are complete and the benefits are meeting expectations. As of this month, we have closed all six plants that were announced as part of the restructuring plan early last year. We are on track to achieve the targeted $55 million of profit improvement this year, after applicable restructuring expenses, and $125 million of annual benefits beginning in fiscal 2011," he added.

"Much of the success of the Pork Group restructuring plan is attributable to the benefits received from shuttering underutilized plants. These plant closures, combined with the rationalization of unprofitable business, have allowed this organization to realize strong bottom line growth. While the plan has intentionally caused a loss of volume in the Pork segment, it has resulted in a more competitive and efficient cost base and improved product mix to begin to focus on profitable top line growth," Mr. Pope said.

Fresh Pork

Fresh pork operating margins, adjusted for charges in both years, were lower compared to the same quarter last year, as a reduction in hog slaughter levels negatively impacted results.

This year, fresh pork operating profit includes $14.7 million of pre-tax charges related to the announced closure of the Sioux City, Iowa plant and Pork segment restructuring. Prior year fresh pork restructuring charges were $21.2 million. Fresh pork volumes in the third quarter, excluding the impact of the extra week, were 7% below volumes in the prior year.

Export volume in the third quarter was flat compared to the same period last year, despite closed export markets in China and Russia, both of which are important markets for U.S. pork. On a historical basis, exports continued to be very strong.

Packaged Meats

Packaged meats operating profits declined modestly from the prior year after adjusting for restructuring charges in both years. The comparative decline reflects planned volume decreases.

In spite of sharply higher raw material costs, packaged meats operating margins remained robust and were in line with the prior year on an adjusted basis.

Volumes were seven per cent lower than the prior year, excluding the extra week. In large measure, volume decreases were planned and resulted from plant closures contemplated in the Pork Group restructuring plan. Results continued to benefit from pricing discipline, rationalization of unprofitable business, lower overhead and other benefits of the restructuring plan.

International

The company's operations in Poland delivered strong results and brand growth as sales volumes increased 24% and operating profits improved by $6.9 million. Campofrio also reported stronger year over year operating results; however, refinancing and restructuring charges swung the company's share of their results to a loss for the quarter.

International segment results are reported on a 13 week basis and are therefore not affected by the extra week in fiscal 2009.

Hog Production

Hog production losses moderated significantly in the third quarter, reflecting a 12 per cent improvement in live hog market prices in the US and a 16 per cent reduction in domestic raising costs. Live hog market prices in the US increased to an average of $44 per hundredweight compared to $40 per hundredweight in the same quarter last year. Domestic raising costs decreased to $51 per hundredweight from $61 per hundredweight in the prior year.

The company's international hog production operations in Poland, Romania and Mexico continued to show strong performance. Operating results in those operations improved by more than $41 million compared to last year.

Shrinking supplies, lower feed costs, positive currency fluctuations and an increase in the number of head marketed all contributed to the improved results.

Other

Results from the company's investment in Butterball increased $4.0 million as improvements in live turkey pricing benefited the business.

The sharp decrease in Other segment sales is attributable to last year's sell-off of the remnants of the company's live cattle operations which have since been sold. Losses from live cattle operations were $14.4 million last year.

Outlook

"Our biggest obstacle for the past two years has been the lack of profitability in our hog production segment. As of the third quarter, those losses have substantially diminished and the futures markets are trending favorably for us," said Mr. Pope.

"We anticipate that fresh pork margins will improve as hog slaughter levels continue to decline and the Sioux City plant is closed in April. In addition, we expect that fiscal 2010 should be the second best year ever for Smithfield fresh pork exports. Our trade representatives are actively working to fully reopen the Chinese and Russian markets and secure the approval of our plants for shipping. I fully expect these markets to be reopened by the end of this fiscal year," he continued.

"This organisation continues to focus on driving profitable growth through our consumer packaged meats business. Consequently, we are very pleased with the ongoing performance of our packaged meats business over the last two years. It is this focus that will continue to propel the company forward," Mr. Pope said.

"Looking forward to fiscal 2011, hog production should be dramatically improved year over year and pork results should be very solid, owing to the restructuring plan that will be complete. If the current trends continue and the export markets reopen, I believe we could have a very good year in fiscal 2011," he concluded.