Smithfield income down, sales up

by Eric Schroeder
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SMITHFIELD, VA. ― Net income at Smithfield Foods Inc. in the third quarter ended Jan. 28 totaled $54.6 million, equal to 41c per share on the common stock, down 10% from $60.4 million, or 54c per share, in the same period a year ago. The most recent quart
erly results include an after-tax loss of $4.5 million from discontinued operations, which compared with a loss of $1.7 million in the previous year.

Net sales were $3,789.5 million, up 16% from $3,276.7 million.

Results for the third quarter were negatively impacted by a significant increase in the company’s estimated effective tax rate. Smithfield believes this adjustment negatively impacted net income by 6c per share, based on previously-anticipated tax rates.

Profits of the pork segment in the quarter more than doubled to $221.5 million, due to the acquisition of Premium Standard Farms in May, lower raw material costs, significant growth in exports and substantial improvement in packaged meats margins. Pork sales rose 13% to $2,605.3 million, while fresh pork volume rose 35%.

Although packaged meats volumes were flat, this sector’s margins expanded about 50%, Smithfield said. Pre-cooked product categories continued to grow, with several convenience-oriented lines showing double-digit growth, including pre-cooked bacon, sausage, ribs and entrées.

Overall, beef segment results increased more than $11 million to $12.2 million. Beef processing earnings rose modestly and cattle feeding was profitable. Although profitable, beef processing margins continued well below historical levels due to continued depressed industry conditions. Third-quarter sales in the beef segment totaled $674.9 million, up 6% from $638.3 million in the same period a year ago.

Hog production operations sustained a loss of $80.7 million, which compared with an operating profit of $4.5 million in the third quarter a year ago. The decline was attributed to considerably lower hog prices and higher raising costs. Sales in the hog production segment, meanwhile, rose 30% to $558 million. Live hog market prices averaged $37 per cwt, down from $44 per cwt last year. Raising costs rose to $49 per cwt versus $42 a year ago on higher grain prices.

In the Other segment, the company’s joint venture turkey operations, Butterball L.L.C., suffered from significantly higher grain costs and equity income was below last year. Operating profit fell 55% to $7 million, while sales climbed 29% to $39.8 million.

Operating profits the international segment eased 6% to $22.3 million despite a sales spike of 53% to $358.8 million. Groupe Smithfield experienced a slight decline in sales volume as well as competitive price pressures which decreased margins in the private label, cooked ham and cooked sausage categories in the French and Dutch markets. Animex operations in Poland continued its trend of improved earnings in spite of hog prices well above last year.

"We enjoyed very strong fresh-pork margins that were much higher than historical levels as a result of lower hog costs and strong industry exports," said C. Larry Pope, president and chief executive officer. "Fortunately, we were able to capitalize on these margins during a period of very high slaughter rates. In addition, I am very pleased with our packaged-meats margins, which benefited from low raw material costs and a continuing focus on this business. We believe that there still are more opportunities in packaged meats.

Smithfield’s fiscal fourth quarter likely will be very difficult because its hog production operations probably will not achieve profitability, Mr. Pope added.

"The key to overall results will be the extent to which our pork segment results offset anticipated weak performance from our hog production segment," Mr. Pope said. "It appears that the hog production industry is reacting to soaring grain prices by reducing herd size. The industry seems to have begun a necessary correction. Meanwhile, pork exports are expected to continue to grow, which will lend support to the hog and pork markets."

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