Smithfield Sales Up but Income Down

9 March 2012, at 8:45am

US - Smithfield Foods saw sales for the third quarter of the 2012 financial year hit $3.5 billion, up nine per cent on the previous year, as a result of higher average unit selling prices and volumes in the pork segment.

However, the company reported net income in the current quarter of $79.0 million ($.49 per diluted share) compared to net income of $202.6 million ($1.21 per diluted share) last year.

For the first nine months of 2012, net income was $281.8 million ($1.72 per diluted share) compared to net income last year of $422.6 million ($2.53 per diluted share).

The company said that both current quarter and year to date operating profit and earnings per share included a number of noteworthy items. For the third quarter, EPS of $.49 included $.18 per diluted share for Campofrío charges, as well as a $.02 per diluted share charge for the early extinguishment of debt. Excluding these charges, adjusted EPS was $.69 on a non-GAAP basis.

Similarly, after adjusting for noteworthy items for the first nine months, non-GAAP EPS was $2.16 in the 2012 financial year compared to non-GAAP EPS of $2.18 in fiscal 2011.

"I am very pleased to report another quarter of strong profitability and, in particular, the progress we have made in improving the quality and consistency of our earnings. Notably, our year to date adjusted earnings closely tracked last year's record results," said C. Larry Pope, president and chief executive officer.

"I am very encouraged by the consistency of our packaged meats margins in periods of both high and low cost raw materials.

"We are beginning to realize the benefits of our long-term strategy to intensify our consumer-focused marketing programs and I applaud the efforts of our sales and marketing team who produced consistently solid margins in our packaged meats business while delivering share and distribution growth in several of our core brands and strategic product categories.

"Although packaged meats volumes declined slightly, we achieved strong sales and volume growth in the third quarter in our Armour, Curly's, Farmland, Gwaltney, John Morrell, and Kretschmar brands," he said.

"We had a very successful holiday ham season, as we leveraged our leading market position in the bone-in ham category to deliver both volume and share gains. In addition, we gained distribution in the BBQ, dry sausage, portable lunches, deli meats, and marinated pork categories," Mr. Pope added.

"This quarter we also entered into a multiyear, integrated partnership with the legendary Richard Petty Motorsports NASCAR team, underscoring our commitment to activate our brands with consumer-focused marketing. As part of the agreement, we will utilise a number of our core brands to communicate with customers to promote future growth and strengthen our position in the marketplace."

"Favourable market conditions continued to support strong fresh pork profitability. Supply and demand remained well in balance, as healthy global demand for pork, particularly from Asia, drove double-digit increases in both export volume and dollars. Although the hog production business recorded a loss for the quarter due to seasonal declines in hog prices, solid fundamentals remained intact. As anticipated, international segment profitability improved, producing record third quarter results after excluding the Campofrío charge," Mr. Pope said.

Fresh Pork

Fresh pork operating margins were above the normalized range at six per cent, or $11 per head, and remained historically strong owing to excellent export demand and relatively stable domestic supplies. Results declined from last year's record levels due to significantly higher raw material costs, as a 23 per cent increase in live hog market prices outweighed an 11 per cent improvement in the USDA pork cutout. Sizable gains in exports led to increases in sales tonnage and head processed of seven per cent and one per cent, respectively.

Packaged Meats

Packaged meats operating margins were at the high end of the normal range at seven per cent, or $.15 per pound. Continued sales discipline and an improvement in product mix toward higher margin core brands allowed the company to pass through the vast majority of raw material price increases. Sales grew by six per cent to $1.7 billion, as average unit selling prices rose by seven per cent. Sales tonnage decreased byn one per cent, although the company grew share in several key product categories, including bacon, BBQ, deli meats, and hotdogs.

Hog Production

Hog Production operating margins were below the normalised range at minus one per cent, or minus $2 per head and reflected the seasonally low period for live hog prices. Year over year, live hog market prices increased 23 per cent to $61 per hundredweight from $50 per hundredweight, while pre-interest raising costs increased 23 per cent to $64 per hundredweight from $52 per hundredweight. Head sold decreased by six per cent, largely attributable to the sale of non-core farm operations last fiscal year and the temporary effects of the Hog Production Cost Savings Initiative.


International segment operating profit, after excluding the Campofrío charge, represented a record quarter of profitability. Results were bolstered by robust earnings in live production, particularly in Eastern Europe, where industry fundamentals turned very favourable.

The third quarter of fiscal 2012 includes a $38.7 million non-cash charge, representing Smithfield's proportionate share of Campofrío's charges, related to a plan to consolidate and streamline their manufacturing operations to improve operating efficiencies and increase use. This is a positive development for Campofrío and Smithfield applauds this action by the management team and fully supports their decision.


"Going forward, our focus will continue to be on developing our sales and marketing platform and brand portfolio by increasing direct-to-consumer advertising and building our innovation pipeline. In addition, we remain committed to achieving further operational efficiencies and improving our cost structure. We have made significant progress on all of these fronts; however, we are not satisfied with our results and we are pursuing opportunities to further improve our business," Mr. Pope said.

"Market fundamentals remain supportive in both fresh pork and hog production with balanced supply and demand. We expect that fresh pork will continue to be a solid contributor to our overall results as U.S. protein supplies contract, supported by ongoing healthy export demand. In the hog production segment, raising costs should remain in the mid $60s per hundredweight this fiscal year and average in the low $60s per hundredweight for fiscal 2013. In addition, the profitability of our international business should remain strong in the coming quarters."

Mr. Pope added: "All indications are that fiscal 2012 will be another very strong year for Smithfield and we expect to continue to deliver consistently solid results in fiscal 2013."