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Second Best Year for Smithfield Foods

15 June 2012, at 9:13am

US - Smithfield Foods has reported a net income of $361.3 million for the last fiancial years - the second best in the company's history.

The company had record sales of $13.3 billion up seven per cent on last year with export sales up by 35 per cent and 24 per cent in volume.

Sales for the fourth quarter of fiscal 2012 were $3.2 billion, up three per cent and net income was $79.5 million in the fourth quarter, compared to net income of $98.4 million last year.

Results for the fourth quarter include $16.8 million, or $.06 per diluted share, for expected insurance reimbursements related to an anticipated settlement of the company's Missouri litigation.

The fourth quarter of fiscal 2011 included a pre-tax charge on the early retirement of debt of $71.1 million.

"Fiscal 2012 net income represented the second best year in Smithfield history — following a record year in fiscal 2011 — and underscored our ability to continue to deliver solid earnings to our shareholders," said C. Larry Pope, president and chief executive officer.

"This year, Smithfield aggressively returned capital to its investors through significant share repurchases. In the last 12 months, we repurchased 11.8 million shares, or 7 per cent of the company, for $242 million. Ongoing share repurchases are a priority," he said.

"Our packaged meats business delivered another outstanding year and, in spite of higher raw material costs, grew operating profit by more than $50 million or $.02 per pound. Our strategy for growth is beginning to pay off, as we continue to coordinate our sales and marketing team approach, focus on our 12 core brands, invest in consumer-focused advertising, and build a strong innovation pipeline to grow share and distribution," Mr. Pope remarked.

"Notably, in fiscal 2012, we gained share in a number of key product categories including bacon, dinner sausage, hot dogs, and marinated pork and increased distribution in bacon, BBQ, deli meats, dry sausage, ham steaks, marinated pork, and portable lunches. In addition, we achieved sales and volume growth in our Armour, Eckrich, Farmland, Gwaltney, John Morrell and Smithfield brands. I am very encouraged by this progress in packaged meats."

"As a result of our heightened marketing, we are making stronger connections with consumers to activate our brands. For example, we initiated a multiyear partnership with Richard Petty Motorsports NASCAR team as a sponsor of 15 races in 2012. Earlier this year, we also completed a state-of-the-art research and development facility in Smithfield, Virginia, that will produce innovations that drive growth.

"In our fresh pork and hog production businesses, fundamentals remained relatively supportive for most of fiscal 2012. For the year, fresh pork earnings were historically strong and profited from a continued robust export environment. Notwithstanding higher raising costs, we delivered margins in our targeted range for our hog production business. In addition, profitability in our international segment increased in the back half of the year," he said.

Full Year Results

Fresh Pork

Operating margins were above the normalised range at four per cent, or $8 per head, resulting from consistent supplies and solid demand, particularly in the export markets.

Results declined from the previous year, as a 15 per cent increase in live hog prices more than offset a 6 per cent increase in the USDA pork cutout. The company processed 1 per cent more hogs.

Packaged Meats

Packaged meats margins grew $.02 per pound and were at the high end of the normalized range at seven per cent, or $.15 per pound, as the company continued to improve its product mix and employ strong pricing discipline to offset higher raw material costs.

Although overall tonnage remained flat, volume of the company's core brands increased two per cent.

Hog Production

Hog Production margins, excluding net litigation charges of $22.2 million, were in the normalized range at six per cent, or $12 per head, but declined slightly from the prior year as an 18 per cent increase in raising costs more than offset a 15 per cent improvement in live hog market prices.

Results were bolstered by sales price premiums and risk management activities. Live hog market prices increased to $65 per hundredweight compared to $57 per hundredweight, while raising costs rose to $64 per hundredweight versus $54 per hundredweight. Volumes declined by four per cent.

International

International segment operating profit, after excluding a $38.7 million Campofrio charge in the third quarter, was in the normalized range at $81.5 million due to strong hog production profitability.

"Looking ahead, I am confident that we have significant opportunities for growth as we continue to invest in our brands and improve operating efficiencies," Mr. Pope said.

"In particular, I believe that our packaged meats business affords us the biggest growth opportunities as we more fully evolve into a consumer packaged meats company. We are gaining momentum in this business and remain committed to increasing our consumer marketing spending and building a consumer relevant product innovation pipeline to fuel this growth. In fiscal 2013, our stakeholders will see a significant amount of new product innovation. As such, we are increasing our normalized range in packaged meats by $.02 per pound to $.12 to $.17 per pound from $.10 to $.15 per pound.

"We expect fundamentals to remain supportive in both fresh pork and hog production with lower overall protein supplies and ongoing solid export demand. We believe that our export business will continue to support our fresh pork profitability, as we develop this important trade channel to capitalize on growing global demand for pork. Although higher pork supplies and softer than expected domestic retail demand are currently adversely impacting fresh pork margins, we expect profitability to improve as we move through the summer months and into the fall when margins are traditionally very good. In the hog production segment, improving grain fundamentals should push raising costs into the low $60s per hundredweight by midway through fiscal 2013 and the high $50s per hundredweight later in the year. In addition, the profitability of our international business should remain strong," he added.

"Our strong and consistent cash flow generation is enabling us to return capital to our investors through continued share repurchases, while pursuing our business strategy and investing in the growth of our packaged meats business. The authorisation of our new $250 million share repurchase program also reflects our continued confidence in the fundamental strength of our business.

"Bottom line, we are optimistic about what the future holds and believe that we are well positioned to drive sustainable growth in packaged meats and to continue to deliver solid earnings in fiscal 2013 and beyond," he said.

Fourth Quarter Results

Fresh Pork

Fresh pork margins declined significantly from last year's exceptional levels and were below the normalized range at one per cent, or $2 per head. An 11 per cent drop in the USDA pork cutout accounted for the majority of the decline, as live hog prices were basically unchanged.

The company processed four per cent more hogs, while industry slaughter levels were 2 per cent higher. Exports remained strong and resulted in a 13 per cent increase in company shipments.

Packaged Meats

Packaged meats operating margins grew considerably and were above the normalized range at seven per cent, or $.16 per pound, as the business benefited from a more coordinated and focused sales strategy, increased investment in marketing talent and consumer advertising, and lower raw material costs.

Sales tonnage increased marginally.

The company gained share in several strategic product categories including bacon and hot dogs. In addition, the company expanded distribution in BBQ, deli meats, dry sausage, ham steaks, and portable lunches and achieved sales and volume growth in its Armour, Farmland, and John Morrell brands.

Hog Production

Hog Production operating margins, excluding insurance reimbursements of $16.8 million, were below the normalised range at three per cent, or $6 per head. Results were favourably impacted by sales price premiums and risk management activities, which protected margins.

Year on year, live hog market prices decreased one per cent, while raising costs rose to $65 per hundredweight versus $57 per hundredweight. Volumes declined two per cent.

International

The International segment reported an operating margin of 6 per cent led by improved performance in the company's hog production operations.