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Sharp Drop in Profits for Smithfield Foods

by 5m Editor
3 December 2007, at 11:10am

US - Meat processing giant Smithfield Foods has seen a sharp drop in income for the second quarter of the year down to $18.7 million compared to $46.4 million for the same period last year.

However the fall in income is marked against a rise in sales to $3.5 billion, compared to $2.8 billion a year ago.

Second quarter results include approximately $13 million of after tax charges, which are related to the previously-announced disease outbreak in the company's Romanian operations and an after tax loss of $25 million related to the effects of foreign currency fluctuations.

Second quarter results in the pork segment, however, rose significantly, reflecting a significant expansion in packaged meats margins, a much-improved fresh pork environment late in the quarter and the contribution of Premium Standard Farms, which was acquired in May, Smithfield said.

Packaged meats profit margins more than doubled. Total volume of key packaged meats categories, including pre-cooked bacon and sausage, boneless and spiral sliced ham and dry sausage, grew 37 percent, primarily the result of the contribution of Armour-Eckrich, acquired in October 2006. These product categories now represent 33 percent of the company's total domestic packaged meats business compared to 29 percent last year. Excluding the impact of Armour-Eckrich, packaged meats volume grew five percent.

Accelerated
Smithfield continued acceleration of its marketing programs, accomplishing national rollouts of several Paula Deen brand specialty products. Pre-cooked entrées Healthy Ones and Sizzle 'n Serve also reached national distribution.

Beef segment results were below those of a year ago. However, the company believes that it has maintained a strong competitive position even as industry economics remained a challenge. Beef processing posted a slight gain in spite of higher cattle prices. Cattle feeding operations recorded a modest profit although feed costs were well above last year.

Hog production profits declined significantly, the result of lower live hog market prices and considerably higher raising costs. Live hog market prices averaged $46 per hundredweight versus $50 per hundredweight a year ago. Raising costs rose to $49 per hundredweight from $41 per hundredweight last year on higher grain costs. In addition, the company experienced write-downs of $13 million in Romania due to the liquidation of livestock inventory and cleanup costs associated with the previously-announced outbreak of classical swine fever at three of the company's farms. During the quarter results also were negatively impacted by $19 million in foreign currency translation losses.

In the other segment, earnings rose at the company's joint venture turkey operation, Butterball, LLC, acquired in October 2006. Increased feed costs at the company's growing operations partially offset strong gains in turkey processing.

International meat processing operating earnings rose sharply, as Groupe Smithfield and Poland operations continued their strong contributions. Results of Groupe Smithfield, a 50 percent-owned joint venture formed through an acquisition in August 2006, almost doubled.

The Animex meat processing operations in Poland demonstrated continued earnings improvement on higher volumes and margins in packaged meats. The profit increase more than offset the negative impact of $6 million in foreign currency translation losses.

"The decline in earnings this quarter was almost entirely in the hog production segment, as most of our other businesses performed well," said C. Larry Pope, president and chief executive officer.

Packed meats improve
"Unquestionably, the highlight of the quarter was the dramatic improvement in packaged meats margins due to an improved product mix and our continuing effort to drive out costs. Additionally, our international meat processing operations have become consistent, growing contributors to profitability," he said.

"We currently are in the middle of our peak holiday ham season. It looks to be another good year for this sector of the business," said Mr. Pope.

"Looking forward, the futures markets indicate continued near-term losses in hog production, but an improving environment as we move into our fiscal fourth quarter and beginning of fiscal 2009," said Mr. Pope.

"Meanwhile, fresh pork margins remain healthy and I expect a continued strong performance from our packaged meats business," he said.

5m Editor