Smithfield Foods Reports 3Q Earnings Fall

VIRGINIA - Smithfield Foods Inc., the world's largest pork producer, said Thursday that its third-quarter profit fell 15 percent on a drop in hog production earnings and high feed costs.
calendar icon 2 March 2007
clock icon 4 minute read

Smithfield Foods, Inc. (announced that income from continuing operations for the third quarter of fiscal 2007 was $60.4 million, or $.54 per diluted share, versus income from continuing operations last year of $75.0 million or $.67 per diluted share. Sales were $3.3 billion versus $2.9 billion a year ago.

Income from continuing operations for the nine-month period was $144.0 million, or $1.29 per diluted share, compared to $175.6 million, or $1.57 per diluted share, last year. Sales for the nine months totaled $8.9 billion versus $8.7 billion in the same nine-month period of the prior year.

The pork segment reflected significantly improved margins in packaged meats which were partially offset by lower margins in fresh pork. The packaged meats improvement reflects 34 percent higher volume and higher overall margins as well as significant contributions from Cook’s Hams and Armour Eckrich, two businesses acquired during the past year. These improvements are the result of a continuing effort to enhance the overall margin structure of the packaged meats business. This involves a focus on lowering costs and changing the mix to higher value-added products. Fresh pork margins continued to be disappointing.

The hog production segment results were substantially below those in the prior year reflecting higher raising costs. Growing costs averaged $42 per hundredweight compared with $38 per hundredweight in the prior year. The increase in raising costs reflect higher grain costs and the continued adverse impact of circovirus on overall production levels, particularly in the company’s eastern operations. The use of recently-developed vaccines appears to have substantial positive benefits. However, the company and the industry continue to experience limited vaccine supplies and further improvement will depend upon adequate supplies. The number of head marketed in the United States was down eight percent versus the same quarter last year. Live hog prices averaged $44 per hundredweight compared with $43 per hundredweight in the prior year.

Hog production incurred losses associated with its commodity risk management activities. A portion of these losses is attributable to expanding the company’s use of mark-to-market accounting for commodity derivative contracts. Given the increasing complexity and costs of hedge accounting, the decision was made to significantly reduce the use of this method in favor of the simpler mark-to-market method.

“Given the adverse conditions in hog production and cattle feeding, I am reasonably satisfied with our third quarter results,” said C. Larry Pope, president and chief executive officer. “I am particularly pleased with the results in our international operations. In addition, our recent acquisitions and investments in Sara Lee European Meats, Cook’s, Armour Eckrich and Butterball have all produced immediately accretive results,” he said.

“Looking forward, the recent rise in the price of corn, as well as other grain costs, will have a significant impact on our business. Corn prices in the range of $4 per bushel will likely remain for some time. In spite of increased raising costs, the futures markets indicate that hog production should continue to be profitable for several more quarters,” Mr. Pope said. “While the fresh meat complex remains challenging, we have put in place strategies to continue to improve margins in our packaged meats business. Our international operations are just beginning to deliver and our beef operations routinely outperform the industry. All of this bodes well for our long-term future. We have said many times that we will not be distracted by the ups and downs of the near-term business, but will focus on the longer term. Over the near term, I remain cautious; however, over the long term, I am very optimistic,” he said.

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