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Smithfield Attributes Losses to Poor Hog Market

by 5m Editor
11 December 2009, at 10:51am

US - Smithfield Foods has reported a second quarter net loss of $26.4 million Despite lower production costs and a 13 per cent reduction in its sow herd.

The company reported sales of $2.7 billion versus $3.1 billion in the same period last year. The decrease is attributable to lower fresh pork selling prices, exchange rate changes in international operations and significantly lower hog prices in the US hog production business.

The company reported a loss from continuing operations for the second quarter of fiscal 2010 of $26.4 million, or $(.17) per diluted share, versus a loss from continuing operations last year of $32.5 million, or $(.23) per diluted share. In last year's second quarter, the company reported income from discontinued operations, net of tax, of $34.2 million, or $.24 per diluted share, related to the operations and sale of its beef business.

The current quarterly results were affected by a number of significant items, including a higher than normal effective tax rate (increased EPS by $.14 per diluted share), restructuring and plant impairment charges in the Pork segment (decreased EPS by $.03 per diluted share), and a loss on the extinguishment of the European credit facility (decreased EPS by $.02 per diluted share). After adjusting for these items, non-GAAP second quarter fiscal 2010 EPS was $(.26).

"Our packaged meats business continued to deliver record profits in the second quarter. This is the part of the business we have focused on and it is repeatedly delivering superior results," said C. Larry Pope, president and chief executive officer. "The restructuring plan is in full swing and achieving benefits that are ahead of schedule with estimated profit improvement of approximately $17 million in the second quarter of fiscal 2010. We expect this plan will deliver the targeted $55 million of profit improvement this year, after applicable restructuring expenses, and the full $125 million of annual benefits going forward," he said.

"Unfortunately, these results were offset by continued losses in hog production. Although raising costs declined again this quarter, domestic hog prices were sharply lower as oversupply conditions in the US persisted," he continued.

Operating margins in fresh pork were strong on a historical basis, although slightly lower than last year. Number of head processed approximated last year's level, but heavier weights resulted in a 2 per cent volume increase. Fresh pork results are benefitting from strong sales discipline and continued improving operating efficiencies. While fresh pork exports for the second quarter of fiscal 2010 declined compared to last year's record levels, overall export volumes remain robust in historical terms. Export shipments to China, which has been closed for all of this fiscal year, are expected to resume in the wake of last week's announcement by the Chinese government of their intent to re-open. This should help the overall pork complex.

Packaged meats profits more than tripled on volumes that were 4 per cent lower than the prior year. Results continued to benefit from pricing discipline, rationalization of low margin business, low raw material costs and the early benefits of the Pork Group restructuring plan.

Hog production losses continued in the second quarter, despite a 16 per cent year over year reduction in raising costs. Domestic raising costs decreased to $53 per hundredweight from $58 per hundredweight in the first quarter of this year and $63 per hundredweight in last year's second quarter. These costs exclude interest, a change from our presentation in prior releases. Live hog market prices in the US decreased 32 per cent to $36 per hundredweight compared to $53 per hundredweight in the same quarter last year.

As previously reported, the company has reduced the size of its US sow herd by 13 per cent, or 130,000 sows. The company believes its reductions will result in over 2.2 million fewer hogs annually by fiscal 2011.

In contrast to domestic hog production, international operations are solidly profitable. Operating profits in the company's Polish, Romanian and Mexican hog operations improved by $35 million on a year over year basis.

"After a considerable and extended period of sizable losses in the hog production industry, the US sow herd appears to be slowly contracting. As previously announced, Smithfield has reduced its exposure to commodity hog and grain markets through sow reductions and farm closings beginning in February 2008. Given current and near-term industry dynamics, we believe that further liquidation is needed to reach a balance in supply and demand," said Mr Pope.

"We are encouraged by the EPA's recent determination to delay its decision on the ethanol industry's petition to raise the allowable ethanol blend in gasoline by a full 50 per cent - from 10 per cent to 15 per cent. The existing ethanol policies have already driven as much as 30 per cent of the annual corn crop into ethanol production, directly and substantially driving up feed costs for livestock and jeopardizing the economic viability of hog producers across the country. We hope that the EPA, after further study and with greater deference to the science and practical consequences of increasing the ethanol blend, will abandon any notion of granting 'E15' in favor of more economically sensible alternatives. Everyone is in favor of developing alternative energy sources, but we should not be reluctant to abandon the flawed corn-based ethanol policy when it has the direct impact of causing higher food costs to the American consumer," he continued.

"On the export front, we are pleased that China has announced its intent to lift its ban on imports of pork from the US and we hope to resume business with them in the near term," he stated.

"Although we are disappointed with the results of the hog production segment, we remain incredibly pleased with the continued profitability of the packaged meats business. While the hog production losses are temporary, we expect the packaged meats business to provide a stable earnings stream far into the future. Hog prices are improving and raising costs have trended downward, although still historically high. Our restructuring plan is working and our cost structure is steadily improving. Looking forward to the second half of fiscal 2010, we expect the company to be profitable. The combination of the many actions taken on the financial, operating and sales fronts make me extremely optimistic as this business returns to a more normal operating environment. For these reasons, we have never been more positive about the earnings power of this company," Mr. Pope concluded.