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Smithfield Reports $107 Million Loss

by 5m Editor
9 September 2009, at 1:17pm

US - US pig meat processing giant Smithfield Foods has reported a loss from continuing operations of $107.7 million for the first quarter of the year compared to a loss of $29.1 million in the previous year.

The loss from continuing operations, after adjusting for significant items, was $80.0 million.

The quarterly results include pre-tax impairment charges totaling $34.1 million on Hog Production farm assets and pre-tax debt extinguishment charges totalling $7.4 million.

The company reported sales of $2.7 billion compared to $3.1 billion in the same period last year and attributed the decline principally to lower volumes, currency fluctuations in its international operations and lower fresh pork selling prices.

The current quarterly results were affected by a number of significant items, including non-cash impairment charges on farm assets and losses on the extinguishment of the old US credit facility. The table below presents the three months ended 2 August 2009, after adjusting the reported loss from continuing operations, before and after tax, and the loss per diluted share adjusted for the impact of significant items.

Fresh Pork

Fresh pork volumes, average unit selling prices, and margins were weak throughout much of the quarter resulting in losses in fresh pork.

First quarter results were the direct result of lower exports and a modest drop in domestic foodservice demand as a result of the recession.

Fresh pork returned to profitability late in the quarter and continues to be solidly profitable in the early weeks of the second quarter.

Fresh pork exports declined 34 per cent from last year's record, primarily due to a substantial decline in sales to China. However, in historical terms, export volumes remain robust.

Packaged Meats

The company's packaged meats business delivered very strong profits in the first quarter. Pricing discipline and rationalisation of unprofitable business pushed margins higher despite a 9 per cent reduction in sales volume and $6 million in charges related to the restructuring effort.

Operating results were nearly $74 million higher than the prior year results. Results benefited from permanent improvements in operating efficiencies and plant utilization, as well as reduced raw material costs.

International

The company's meat processing operations in Poland and Romania were profitable in the quarter in spite of relatively high raw material costs.

Sales volumes in these two countries improved a combined 10 per cent over last year. Campofrio Food Group results contributed income of $3.6 million in the quarter against a loss last year.

Hog Production

Hog production losses continued in the first quarter, despite reductions in raising costs. Live hog market prices in the US decreased 24 per cent to $42 per hundredweight compared to $55 per hundredweight in the same quarter last year, due to an oversupply of live hogs in the US Domestic raising costs decreased from the prior year and the fourth quarter of fiscal 2009. Domestic raising costs decreased to $59 per hundredweight from $61 per hundredweight in the prior year and $63 per hundredweight in the fourth quarter of fiscal 2009.

This quarter's losses include a non-cash impairment charge of $34.1 million related to the write-down of farm assets of noncore hog operations in which the company is ceasing production or offering the farms for sale.

As previously announced, the company reduced the size of its U.S. sow herd by 10 per cent in reaction to overall industry conditions and to modestly reduce its exposure to the live production side of the business. This has resulted in a reduction of 100,000 sows. In June 2009, the company announced a further reduction of its sow herd by three per cent, or approximately 30,000 sows. The company believes these actions will result in approximately 2.2 million fewer market hogs annually by fiscal 2011.

"This first quarter loss reflects the continuing adverse business environment in the hog production segment of the company's operations. While raising costs have continued to decline and the pork processing segment continues to deliver strong profits, they were not sufficient to offset the negative impact of low hog prices on the hog production business. The sharply lower hog prices reflect the impact of the A(H1N1) outbreak at the end of the prior quarter and softer export demand," said C. Larry Pope, president and chief executive officer.

"We continue to execute the Pork Group restructuring plan on or ahead of schedule. Five of the six plants that were targeted for closure have been closed and the remaining plant will be closed in the third quarter. Smithfield is already benefitting from the Pork Group restructuring plan and we are on track to achieve annual cost savings of approximately $55 million, after applicable restructuring expenses, in fiscal 2010 and $125 million by fiscal 2011," he continued.

"On the financing front, a new $1 billion asset backed lending (ABL) credit facility, together with a new $200 million term loan and our July and August notes offerings, totaling $850 million, have positioned us to retire all near term debt maturities, repay our revolving credit facilities and further reduce our exposure to financial covenant risks, while maintaining ample liquidity. These steps have strengthened our balance sheet and helped position us to better weather the current economic environment," Mr. Pope concluded.