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Premium Standard Farms, Inc. Reports Fiscal Third Quarter,

by 5m Editor
5 February 2007, at 11:28am

US - Premium Standard Farms, Inc., a leading vertically integrated provider of pork products, today announced results for its fiscal year 2007 third quarter ended December 23, 2006.

Fiscal Third Quarter 2007:
  • Operating income in the processing segment increased by 12.7%; Sales margins improved in this segment
  • Health issues negatively affected the quarter, but positive results are being seen from vaccines
  • Special meeting of stockholders to be held on February 23, 2007 to vote to adopt the merger agreement with Smithfield Foods
  • Milan, MO processing plant expansion remains on schedule and on budget PSF entered into a supply agreement for process verified hogs from independent hog producers to supplement Milan plant capacity expansion

Fiscal Third Quarter Results

Net sales for the quarter decreased 7.7% to $224.3 million, compared to $242.9 million during the third quarter of fiscal 2006. Net sales for the quarter were negatively impacted by a $22.4 million decrease in total volume, which can be primarily attributed to health-related issues in the Company's production segment. However, this decline was slightly offset by an improvement of $2.9 million from lean hog and wholesale pork prices, as well as a $0.9 million increase over the same period last year related to lean hog futures.

Net income for the fiscal third quarter was $2.9 million, or $0.09 per diluted share, compared with net income of $13.8 million, or $0.44 per diluted share, in the same period last year. Net income for the third quarter of fiscal 2007 includes costs related to the proposed merger with Smithfield Foods, Inc. of $2.8 million, or $0.09 per diluted shares.

"Despite the strength of current live hog and wholesale pork prices, lingering health issues in our production segment and significantly higher feed costs negatively impacted our operating results," commented John Meyer, CEO and President of Premium Standard Farms. "We continue to proactively address these health concerns with the implementation of a number of programs, including the vaccinations we have discussed in previous quarters from which we have experienced positive results. During the third quarter, we increased the number of vaccinations to treat the Porcine Circo Virus (Circo), but will not realize the benefits of these actions in our herds until the fiscal fourth quarter of 2007. We expect to experience improvement in our herd health in the upcoming fourth quarter resulting from the increased vaccinations, but we still expect to produce lower volumes than in the fourth quarter of last year because of health issues. Conversely, in our processing segment, we were pleased to realize anticipated improvements in both our sales margins, as well as a 12.7% increase in operating income for the quarter. As we look to the future, we continue to work closely with Smithfield Foods and the appropriate regulatory agencies to complete the proposed merger."

First Nine Months Fiscal 2007 Results

Net sales for the first nine months of fiscal 2007 were $650.9 million compared to $701.4 million last year. With respect to the same period last year, the Company's net sales during the nine months were negatively impacted by a $42.4 million decrease in production volume combined with a decline in results related to lean hog futures of $11.9 million. These factors were partially offset by a $3.8 million improvement in live hog and wholesale pork prices.

Net income in the first nine months of fiscal 2007 was $14.8 million, or $0.46 per diluted share, compared to net income of $41.4 million, or $1.32 per diluted share, in the same period last year. The results for the first nine months of fiscal 2007 included $4.0 million in charges for merger-related activities, as well as a $7.4 million charge for the settlement of a portion of an outstanding legal case and reserves for other similar cases pending, which combined, after-tax totals $0.27 per diluted share. Results for the first nine months of fiscal 2006 included a $21.7 million pre-tax charge from the early extinguishment of debt, representing an after-tax charge of $0.43 per diluted share.

Operational Results: Processing Segment

Net sales in the processing segment decreased $16.5 million from $222.3 million to $205.8 million in the third quarter of fiscal 2007 compared to the prior year. Processing volume for the third quarter of fiscal 2007 decreased 6.0% compared to the same period last year due to lower volumes being processed through our plants, which resulted from lower hog production in Premium Standard Farms' production segment. Operating income for the third quarter increased 12.7% to $7.1 million from $6.3 million in the prior year.

During the third quarter of fiscal 2007, the Company made good progress in its goal of improving sales margins and overall operating margins in the processing segment. The improved results were related to favorable market conditions and improved product mix across business channels. Margins for fresh meat were strong for exports, particularly in Japan and Mexico, coupled with positive domestic growth in processed meats, especially bacon products, and new foodservice business.

For the nine months ended December 23, 2006, sales in the processing segment decreased 4.1% to $601.3 million from $626.7 million in the comparable period last year. This decline was largely the result of a decrease in volume processed during the first nine months of fiscal 2007 compared to the same period last year, which can be primarily attributed to reduced productivity from the Company's hog production segment.

Production Segment

In the third quarter of fiscal 2007, production sales decreased by 9.3%, or $14.0 million, to $137.2 million from $151.2 million in the comparable period last year. This decline can be attributed to a 10.5% decrease in volume primarily relating to health issues across the segment partially offset by a 0.6% improvement in live hog sale prices. Additionally, during the quarter, the Company benefited from a $0.9 million improvement in results related to lean hog futures contracts compared to the same period in the prior year. Operating income for the third quarter decreased to $5.9 million compared to $22.7 million in the previous year due primarily to lower productivity across the segment and a 31.5% increase in feed costs.

Net sales decreased by 11.9% to $412.1 million from $467.7 million in the first nine months of fiscal 2007. This primarily resulted from a 7.9% decrease in overall production volume coupled with a 1.8% decline in live hog sale prices. Premium Standard Farms' results were also negatively impacted during the first nine months of fiscal 2007 due to an $11.9 million decrease in results related to lean hog futures contracts recorded compared to the same period in the prior year.

Additional Comments

The previously noted Milan, MO expansion continues to remain on schedule and on budget. This expansion will take the daily maximum processing capacity to 10,000 head per day and enhance plant capacity by 35% and total company processing capacity by 15%. During the third quarter of fiscal 2007, Premium Standard Farms entered into a supply agreement with a group of independent hog producers for process-verified hogs that will aid the Company in reaching its new capacity levels.

On September 18, 2006, Premium Standard Farms and Smithfield Foods announced their plans to merge. Under the terms of the merger, each share of Premium Standard Farms will be converted into the right to receive 0.678 of a share of Smithfield Foods' common stock plus $1.25 in cash. A special meeting of stockholders of Premium Standard Farms, Inc. is being held on February 23, 2007 to vote to adopt the merger agreement.

5m Editor