Smithfield Sees Sales Slide

11 December 2012, at 8:54am

US - US pig meat processing giant, Smithfield Foods, has reported sales for the second quarter of the 2013 financial year of $3.2 billion, down three per cent.

The company said that higher volumes in all segments were more than offset by lower meat and live hog prices.

Net income was $10.9 million compared to net income of $120.7 million for teh same period last year.

In the second quarter, the company issued $1 billion 6.625 per cent senior unsecured notes due 2022, which yielded net proceeds of $981 million. repurchased $105 million of the $160 million outstanding balance of 2013 senior unsecured notes (7.75 per cent coupon), repurchased the entire $589 million outstanding balance of 2014 senior secured notes (10 per cent coupon and secured a two year extension for $200 million bank term loan from fiscal 2017 to fiscal 2019 to refinance its balance sheet.

This helped to lower borrowing rates, dramatically improv3 its debt maturity profile and eliminate all long term secured debt obligations.

In connection with these transactions, the company recorded a pre-tax early debt extinguishment charge of $120.7 million, in the second quarter of the year.

"Our solid second quarter performance reflects the results of our ongoing efforts to deliver higher quality and more consistent earnings to our shareholders led by growth in our packaged meats business, even when faced with challenging commodity markets," said C. Larry Pope, president and chief executive officer.

"In addition to higher packaged meats margins, volumes improved on a year over year basis for the third consecutive quarter, growing by 2%. Volume and sales grew across all key trade channels, more than offsetting double-digit declines in our industrial business. Strong retail channel performance — which accounted for more than half of packaged meats volume in the quarter — was led by growth in our Armour, Farmland, John Morrell and Kretschmar brands. New business with a number of national accounts continued to support growth and provide momentum in the foodservice channel. Gains in deli were fueled by our Eckrich brand with the introduction of Eckrich Bacon Lovers Deli Meats late last fiscal year, as well as our Kretschmar brand," he added.

"Our growth in packaged meats was broad-based, driven by a combination of brand activation, new product launches, market share improvements and distribution gains. In addition to our ongoing NASCAR sponsorship, we recently launched cause-marketing campaigns with several of our core brands, creating heightened brand awareness through millions of media impressions with consumers.

"We introduced a number of new products to the marketplace under our health and wellness, convenience and taste platforms with our Armour, Eckrich, John Morrell and Smithfield brands. We also gained national distribution with our Farmland and Smithfield branded All Natural Case Ready Pork at a major national retailer.

"Our market share in dry sausage, hot dogs and portable lunches increased and we expanded distribution in deli meats, dinner sausage, dry sausage and portable lunches. Of particular note, we continued to add to our leading position in bacon, exceeding 20% branded market share for the first time, an important hurdle to cross."

"Our fresh pork and international businesses also delivered impressive quarters. Fresh pork results rallied in the second quarter after a disappointing first quarter. Widespread retail pork feature activity fueled domestic demand, while export demand continued to be very good, although large shipments to China in the prior year caused overall volumes to decline. Excluding the China carcass business last year, export sales rose in the quarter. We also continued to focus on moving up the value chain in our fresh pork business, while generating operating efficiencies to drive improved earnings," he stated.

"Although we were dissatisfied by the performance in our hog production business, our successful risk management strategy mitigated losses and produced results that we believe were significantly better than the industry as a whole," Mr. Pope said.

"Our strong and consistent cash flow generation, ample liquidity, and conservative balance sheet are enabling us to return capital to our investors through continued share repurchases. In the last seventeen months, we have repurchased 28 million shares, or more than 17% of the company, for about $575 million," he remarked.

Fresh Pork

Fresh pork operating margins were robust at eight per cent, or $13 per head, and rebounded sharply from the prior quarter.

Results were positively impacted by product mix improvements toward branded value-added products, as well as widespread domestic retail feature activity for pork and continued solid export demand.

Larger industry pork supplies contributed to a 15% decline in the USDA pork cutout, but were offset by a 15 per cent drop in live hog prices. The company processed three per cent more hogs.

Packaged Meats

Packaged meats operating margins improved to seven per cent, or $.15 per pound, driven by an enhanced product mix, higher MAP spending and lower raw material costs.

Volumes grew by two per cent with strong gains in several key product categories including bacon, sausage and spiral hams.

In addition, volume and sales increased across all key trade channels, including retail, foodservice, deli and export and more than offset double-digit declines in the company's industrial business.

Hog Production

Hog production operating margins were disappointing at minus four per cent, or minus $8 per head, but were positively impacted by strong favourable hedge positions that diminished the impact of higher grain costs and lower live hog prices.

Live hog market prices and raising costs averaged $58 per hundredweight and $69 per hundredweight, respectively.

The number of head sold rose by two per cent, resulting from improved efficiencies from the Hog Production Cost Savings Initiative.


International segment operating profit more than doubled to $40.9 million primarily on robust results in the company's Eastern European hog production operations, notwithstanding the negative impact of currency translation.

Average unit selling prices improved considerably in Romania, as the company continued to benefit from recent approval to export to the EU. Recessionary pressures and higher raw material costs continued to weigh on Campofrio's margins.


"We are encouraged by our solid performance in the first half of fiscal 2013 and anticipate strong results in the back half of the year," Mr. Pope said.

"We expect our packaged meats business to continue to lead the way, delivering consistent growth with increased share and broader distribution of our core brands in key product categories. All indications are that 2012 will be a very successful holiday ham season for our company with our new Smithfield Pecan Praline and Caramel Apple Spiral Sliced Hams, as well as our Cook's Spiral Sliced Hams. As such, we anticipate top and bottom line growth in hams in the third quarter. This year, packaged meats margins should be at the high end of the normalized range with 2-3% volume growth," he commented.

"Industry analysts forecast record pork exports again in calendar 2013, as lower global pork production and higher pork prices — especially in the EU — should bolster demand for US pork. These positive fundamentals should be supportive of healthy fresh pork profitability in the normalized range for fiscal 2013," Mr. Pope remarked.

"In the hog production segment, we expect hog prices to recover seasonally in the second half of the fiscal year. Lower supplies of competing proteins should also support higher hog prices. Our risk management strategy should continue to lessen the effects of higher priced grain on our raising costs. We expect our hog production segment to be slightly profitable by the end of the fiscal year and approximately breakeven for the full fiscal year," he continued.

"Operating profits in our international segment should be in the upper half of the normalised range in fiscal 2013, led by continued strong performance in our hog production and meat processing businesses in Poland and Romania," Mr. Pope said.

"We continue to believe that our current stock price undervalues our company, witnessed by our significant share repurchases over the past year and a half. This action reflects our belief in the fundamental strength of our business and our confidence in our ability to deliver higher quality and more consistent earnings to our shareholders led by growth in our packaged meats business. Looking forward, fiscal 2013 should be another very strong year for company. The future growth prospects for our company are strong and we are optimistic that the best is yet to come," he concluded.