Hog producing giant Smithfield Foods has posted earnings of US$11.8m (US$0.11 per diluted share) for its Q1 2003, ended 28 July, a considerable drop from US$56.9m (US$0.53 per diluted share) a year ago, due to the impact of two unusual items adding US$1.2m after tax to net income in Q1 2002.
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The results also reflected sharply higher margins on processed meats and a strong contribution from the company’s beef operations. These improvements, however, were not sufficient to offset dramatically lower live hog prices that adversely affected Hog Production Group (HPG) earnings and weak fresh pork margins that resulted from the continuing excess supply of chicken, pork and beef in the US marketplace. Sales in the quarter were US$2bn, 22% above US$1.6bn last year. Sales of recently-acquired companies were primarily responsible for the sales increase.
HPG operating earnings were US$18.9m, a massive drop from US$119.7m last year, as live hog prices were down 28% on the previous year. The operating earnings decline was less than the decline in live hog prices, reflecting improved efficiencies in HPG operations resulting from the consolidation of the company’s production operations last year.
Meat Processing Group (MPG) operating income was US$39.2m versus a loss of US$0.5m last year. MPG profits improved substantially as a result of the performance of the beef division and volume and margin growth in processed meats. The beef division produced operating earnings of US$21.9m, compared to a US$0.6m loss year on year, prior to the acquisition of Packerland. The higher beef earnings reflected the overall favourable market environment for beef and operating improvements made at Packerland and Moyer since their acquisition.
Processed meats margins increased dramatically in most product lines, as volume grew more than 10% compared with the prior year, including double-digit volume growth in the bacon and ham categories. Lower raw material costs contributed to the margin improvement.
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By GlobalDataThe total pork division earned US$3.6m versus a loss of US$5.3m last year, as the solid performance in processed meats was offset somewhat by significantly lower fresh pork results. The Q1 is generally the weakest for fresh pork. This seasonal impact, combined with increased supply of other proteins in the market, in part related to unfavourable export markets for chicken, further depressed prices for the company’s fresh pork. Operating earnings of US$13.7m from the company’s international operations were well above US$5.4m year on year due to strong results in Canada and sharply reduced losses at the company’s Polish operations.
Results by division
13 Weeks Ended 13 Weeks Ended
(in millions) 28 July 2002 29 July 2001
Sales
Hog Production Group $273.8 $361.6
Meat Processing Group:
Pork 1,054.9 1,159.4
Beef 559.0 58.2
International 322.8 330.0
Intercompany (10.2) (6.2)
Total Meat Processing Group 1,926.5 1,541.4
Intersegment (199.6) (266.6)
Total Company Sales $2,000.7 $1,636.4
Operating Profit
Hog Production Group $18.9 $119.7
Meat Processing Group:
Pork 3.6 (5.3)
Beef 21.9 (0.6)
International 13.7 5.4
Total Meat Processing Group 39.2 (0.5)
Corporate (14.9) (13.3)
Total Company Operating Profit $43.2 $105.9
Operating profit in the 13 weeks ended 29 July 2001 in the HPG includes a US$5m loss as the result of a fire at a hog farm.
“Clearly, the bright spots in this year’s quarter was the strong performance of our beef operations and processed meats business,” said Joseph W. Luter, III, chairman and CEP. “The addition of Moyer and Packerland have added another dimension to our business. In addition, processed meats continue to be an area of focused margin improvement, given that we have, in large measure, achieved a balance between fresh pork and processed meats.”
Hog cycles have been a part of this industry for the past 100 years. Unprofitability in hog production always has resulted in herd reductions, followed by a return to higher prices and profitability, Luter noted. “Given this historical pattern, we remain convinced that our vertical integration strategy will ensure superior results, despite temporary losses in hog production,” he added.
“Looking forward, it appears that live hog prices will remain depressed for the remainder of calendar year 2002,” said Luter. “This will negatively impact earnings in our production operations, and it is unlikely that we can fully recover this profitability in meat processing. Longer term, however, the strategic steps we have taken in our processed meats business to strengthen margins and broaden the product base through line extensions and acquisitions should result in higher earnings when livestock prices return to more normal levels.”
Continuing its long-standing policy of share repurchase, the company acquired 949,600 shares of Smithfield Foods common stock in the first quarter.
Consolidated statements of income
(In US$m, except per share data)
13 Weeks Ended 13 Weeks Ended
28 July 2002 29 July 2001
Sales $2,000.7 $1,636.4
Cost of sales 1,777.1 1,382.6
Gross profit 223.6 253.8
Selling, general and administrative
expenses 140.9 116.2
Depreciation expense 39.5 31.7
Interest expense 24.9 19.6
Gain on sale of IBP common stock – (7.0)
Income before income taxes 18.3 93.3
Income taxes 6.5 36.4
Net income $11.8 $56.9
Net income per common share:
Basic $.11 $.54
Diluted $.11 $.53
Average common shares outstanding:
Basic 110.0 104.9
Diluted 111.6 106.9
