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Smithfield Records $100 Million Quarter Loss

by 5m Editor
12 March 2009, at 6:08am

US - US pig meat processing giant, Smithfield foods saw a net loss of $103.1 million, including non-recurring items and charges in the third quarter of the year.

The company reported a loss from continuing operations, including non-recurring charges and items, for the third quarter of 2009 of $105.5 million.

The loss from continuing operations on a non-GAAP basis, excluding the non-recurring items and charges, was $21.4 million.

Sales were $3.3 billion compared to $3.1 billion a year ago. The current quarter included 14 weeks compared to 13 weeks in last year's third quarter.

The current quarterly results were affected by a number of non-recurring items and mark to market adjustments on derivative instruments. The table below presents the three months ended 1 February 2009, adjusting the reported loss from continuing operations, before and after tax, and the loss per diluted share adjusted for the impact of significant items.

The company ended the quarter with $960 million in available liquidity and it said its debt was reduced by more than $300 million, lowering debt to capitalization to 53 per cent.

In February, Smithfield Foods entered into new covenant amendments to its U.S. and European credit facilities. The amendments provide, among other things, for a reduction of the applicable interest coverage ratio through the third quarter of the 2010 financial year.

"Our results indicate that, despite the difficult environment and losses we have sustained in swine production, many parts of Smithfield are performing extremely well. Our focus on improving packaged meats results is paying off. We earned record margins in this business in the quarter. Once our restructuring plan takes hold, these margins are expected to widen even further," said C. Larry Pope, president and chief executive officer.

"The pork results were more than offset by the restructuring charge and highly unfavorable conditions in the hog production segment. Our cost structure continued to reflect high-priced grain purchased last summer, which kept our raising costs at near-record levels while hog prices remained low.

"We expect that the recent decline in grain will begin to work its way through our cost structure, thereby providing us with better performance in our hog production operations. Our international businesses began to reflect the very weak European economy," he said.

"I am also pleased that we continued to make significant progress on improving our balance sheet, reducing debt and increasing liquidity."

Pork

Record packaged meats results were offset in the pork segment by $84.8 million of restructuring charges and weaker fresh pork margins. Fresh pork volume was flat on a comparable basis to last year.

Total packaged meats margins expanded substantially despite a modest volume decrease of four percent compared to a year ago due to price discipline and continued emphasis on operating efficiencies.

Export demand in several markets was significantly stronger than a year ago.

Third-quarter exports last year included sales of 70 million pounds of pork carcasses to China, representing 22 per cent of total exports.

Even though there were no similar sales this quarter, export sales were down only two percent from the record levels of last year.

Excluding the incremental carcass sales last year, export sales rose 26 per cent.

Smithfield's top five importing countries, China/Hong Kong, Japan, Mexico, Korea and Russia, represent over 80 per cent of total exports. With the exception of Russia, exports to these countries increased between 11 per cent and 75 per cent.

International

International segment results were below those of a year ago.

Campofrio and Groupe Smithfield earnings declined due to high input costs and slow demand in Western Europe.

Results in Poland improved by 36 per cent before the currency losses.

Earnings improved in Romania in spite of considerably higher hog costs.

Campofrio-Groupe Smithfield Merger Completed

The merger between Campofrio and Groupe Smithfield was finalized in December. Smithfield Foods owns 37 per cent of the new company, Campofrio Food Group.

Previously, Smithfield owned 25 per cent of Campofrio and 50 percent of Groupe Smithfield. As of the date of the transaction, the market value of the Smithfield holdings was $415 million.

The transaction resulted in a pre-tax gain of $56.0 million, which is reflected as "other income" in the accompanying consolidated statements of income.

The gain represents the difference between the market value of the new shares in Campofrio and the book value of Smithfield's investment in Groupe Smithfield.

Income taxes on the gain included a catch-up for taxes on prior years' income which was previously deemed to be permanently reinvested. This catch-up had the effect of lowering the current quarter effective income tax rate to 19 per cent.

This lower rate negatively impacted net income by $20.1 million ($.14 per diluted share) based on previously anticipated tax rates.

Hog Production

Hog production losses continued due to extremely high feed costs. Domestic raising costs increased to $62 per hundredweight versus $49 per hundredweight in the prior year. Live hog market prices in the US were $40 per hundredweight compared to $37 per hundredweight last year.

Grain prices have fallen dramatically from record high levels of last summer.

While some thought last year that the industry might run out of corn, Smithfield locked in availability through the end of this fiscal year at price levels over $6 per bushel, well above current market prices.

Pig raising costs will begin to reflect lower corn prices beginning in the first quarter of the 2010 financial year.

Murphy-Brown, Smithfield's hog production subsidiary, has liquidated 10 percent of its United States sow herd in the last year.

This has resulted in a reduction of 100,000 sows and which will result in production of approximately two million fewer market hogs annually, beginning in 2010.

Cattle Sale

The large increase in Other segment sales was primarily due to the sell-off of $50.9 million of the company's cattle inventory.

Lower segment results reflect cattle inventory write downs.

Debt Repurchase

During November and December, the company bought $93.7 million face value of public bonds maturing in 2009. This resulted in a pre-tax gain of $7.5 million, which is reflected in "other income" in the accompanying consolidated statements of income.

Pork Group Restructuring Plan

In February, the company announced a wide ranging restructuring plan for its Pork segment.

"We expect the pork group restructuring plan to result in annual cost savings of $55 million in fiscal 2010 and $125 million by fiscal 2011.

"This plan will create true synergies between our independent operating companies and produce more opportunities to improve the bottom line in the future," said Mr. Pope.

Outlook

"Looking forward, I fully expect the fourth quarter to be another difficult quarter with continued substantial losses in hog production," Mr. Pope said.

"However, I am reasonably optimistic about fiscal 2010 in spite of the current recession.

"Our raising costs should decline significantly and the impact of reduced protein supplies of all types should bode well for hog prices and meat prices. Our packaged meats business is improving very nicely and I expect this to continue.

"In addition, the restructuring of our pork group should deliver significant benefits to the bottom line during the year," Mr. Pope said.

"All of this is encouraging and leads one to believe that fiscal 2010 should be a much better year for the company," he concluded.