Strong pork results lead to profit at Smithfield

by Eric Schroeder
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SMITHFIELD, VA. — Strong global demand for pork helped propel Smithfield Foods, Inc. to profitability in fiscal 2011. Net income in the year ended May 1 totaled $521 million, equal to $3.14 per share on the common stock. This compared with a loss of $101.4 million in fiscal 2010.

Net sales for the full year totaled $12,202.7 million, up 9% from $11,202.6 million.

Full-year results benefited from a strong fourth quarter in which Smithfield posted income of $98.4 million and sales of $3,116.4 million. This compared with a loss of $4.6 million and sales of $2,910.2 million in the same period of fiscal 2010.

“Fiscal 2011 was an outstanding year for Smithfield, and I applaud the remarkable performance of our employees in producing these results,” said C. Larry Pope, president and chief executive officer. “This year’s earnings far exceeded those of our last record year and demonstrated an important shift in the key drivers of our business model toward consumer packaged meats, as more than two-thirds of our profits were generated by the Pork segment.

“Industry fundamentals were very supportive of record profitability in fiscal 2011. Strong global demand for pork, coupled with tight supplies, generated record margins in our fresh pork business. At the same time, Hog Production segment earnings improved significantly, as lower hog inventories boosted live hog market prices and favorable grain hedges yielded raising costs in the mid $50s per cwt for the year.

“In addition, we continued to leverage our restructured Pork Group to effectively maintain pricing and deliver normalized margins in our packaged meats business despite substantial increases in raw material costs. This year we accomplished double-digit growth in several of our key strategic brands and product categories, including Armour LunchMakers, Curly’s Barbecue, Kretschmar Deli and Smithfield Marinade.

Operating profit in the company’s Pork segment rose 6% to $753.4 million in the year ended May 1. Within the segment, Fresh Pork operating profit was $406.5 million, up sharply from $61.1 million in fiscal 2010. Meanwhile, operating profit for Packaged Meats eased 27% to $346.9 million from $477.6 million.

Total Pork sales during fiscal 2011 were $10,263.9 million, up 10% from $9,326.3 million. Within the segment, Fresh Pork sales rose 8% to $4,542.7 million and Packaged Meats sales increased 12% to $5,721.2 million.

“The company delivered record fresh pork margins of 9%, or $15 per head, resulting from tight supplies and strong demand, particularly in the export markets, which supported historically high pork cutout values,” Smithfield said. “The company processed 10% fewer hogs, causing volume to decline 8%, mainly as a result of the closure of the Sioux City, Iowa, plant in April 2010.

“The company’s coordinated sales and marketing platform continued to employ strong pricing discipline to deliver solid packaged meats margins of 6%, or 13c per lb, in the face of record high raw material costs. Volume decreased approximately 4%.”

Operating profit in the Hog Production unit totaled $224.4 million in fiscal 2011, which compared with a loss of $539.2 million in fiscal 2010. Net sales were $2,705.1 million, up 23% from $2,207.8 million.

“Hog production margins rebounded substantially to 8%, or $14 per head, as a reduction in hog inventories drove a 29% increase in live hog market prices to $57 per cwt, while pre-interest raising costs were approximately equal to the prior year at $54 per cwt,” Smithfield said. “Volumes declined 6% as the company divested several non-core hog farms.”

Looking ahead to fiscal 2012, Mr. Pope said Smithfield expects to improve its packaged meats business and is committed to maintaining strong pricing discipline to deliver margins in normalized ranges.

“One of our top priorities this year is to achieve profitable top-line growth in our consumer packaged meats business, which will be fueled by increased consumer marketing of our key brands,” Mr. Pope said. “Balanced supply and demand and strong exports should yield solid fresh pork margins, although we anticipate that profitability will return to more normalized levels. Given these factors, overall Pork segment profitability should continue to be robust in fiscal 2012.

“Furthermore, continued low global protein inventories are supporting a higher hog futures curve and yielding hog production profitability in fiscal 2012, despite higher grain prices that will push raising costs into the mid $60s per cwt. In addition, the Hog Production Group cost savings initiative is well under way and should improve our long-term cost structure.”

In addition to the release of its financials, Smithfield announced its board of directors has approved a $150 million share repurchase program.

“This decision underscores our commitment to drive value growth for our shareholders, coupled with our belief that our current stock price does not accurately reflect the earnings power of our business,” Mr. Pope said.

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