Smithfield Foods Cuts its Losses

US - US pig meat and food processing giant, Smithfield Foods made a net loss over the last year of $101.4 million.
calendar icon 18 June 2010
clock icon 9 minute read

However, in releasing its fourth quarter and end of year results, the company said that this was an improvement of $97.0 million over the pevious year year.

Smithfield said that comparative operating results in every segment improved significantly and consolidated results improved by $286.7 million, or 128 per cent from last year.

Sales for the fourth quarter of 2010 financial year were $2.9 billion, up two per cent compared to the fourth quarter of the 2009 financial year.

Sales for the full financial year were $11.2 billion compared to $12.5 billion last year. The effect of an extra week in the third quarter of 2009, combined with lower average unit selling prices, currency fluctuations and planned volume reductions resulting from the Pork Group restructuring plan, all contributed to the year on year decline.

The company reported a net loss in the fourth quarter of $4.6 million compared to a net loss of $81.2 million last year, an improvement of $76.6 million.

For the full fiscal year, the net loss totaled $101.4 million compared to a net loss of $198.4 million in the previous fiscal year, an improvement of $97.0 million. Last year's net loss included income from discontinued operations, net of tax, of $52.5 million.

The fourth quarterly results include a number of significant items affecting pre-tax figures, including a $73.0 million unfavourable mark-to-market adjustment on open derivative positions and charges for a new Hog Production segment cost savings initiative and the final stages of the Pork segment restructuring totaling $12.9 million.

The effective income tax rate for the quarter was higher than anticipated and had a favourable impact on earnings because it is applied to a pre-tax loss.

"The last two years were by far the most challenging in over 30 years. The contributing factors - global recessionary conditions, unfounded fears about A(H1N1) and the resultant closures of some key export markets, spiking grain prices and extended low hog prices tied to a significant oversupply of live hogs - are all well documented. These factors, combined with the extremely slow pace of herd liquidation in spite of mounting industry losses, all conspired to make for one of the longest and deepest downturns ever in live hog production," said C. Larry Pope, president and chief executive officer.

"Finally, the hog production cycle has turned. Live production losses, particularly on the cash side, have abated. Although our fourth quarter Hog Production segment results do not yet reflect the full benefits of the recently improved live hog production environment, the recovery in the cash and futures markets for hogs is encouraging and has allowed for significant year over year improvements in that business," he added.

"While this is good news, we are not satisfied with our Hog Production segment cost structure and we are initiating a new Hog Production cost savings initiative aimed at significantly improving our competitive position. Although the benefits will not be immediate, the long term impact should be very beneficial," Mr. Pope said.

"Beyond the losses in live production, we have had a number of bright spots. In fiscal 2010, we continued to deliver quality and consistent earnings in our Pork segment, with another record year in our packaged meats business. We completed all of the action items called for in the Pork Group restructuring plan on or ahead of schedule and achieved our targeted annual profit improvement of $55 million in fiscal 2010. The Pork segment has realised strong bottom line growth, as it has reaped the benefits of a substantially improved cost structure and improved product mix.

"We have also made significant improvements to our balance sheet, with a strong concentration on reducing leverage, maintaining ample liquidity, extending maturities and eliminating covenants.

"In addition, notwithstanding the closure of the Chinese and Russian markets for much of the year, fiscal 2010 was the second best year ever for Smithfield fresh pork exports. We are pleased that these markets have recently reopened," Mr Popoe said.

Fresh Pork

The fresh pork environment improved in the quarter and operating margins were $28.6 million higher than last year, despite a 23 per cent increase in live hog market prices and a 12 per cent decrease in volume.

The volume decline was a result of lower available hog supplies; slaughter levels were 11 per cen below the same quarter last year. In addition, current results include a $14.9 million unfavourable mark-to-market adjustment in the Pork segment's open derivative contracts.

Fourth quarter export volume declined, but was strong on a historical basis. Border restrictions in China and Russia, which began in April 2009, together with the recession in Japan, negatively impacted export volume this year.

In the first half of the year, fresh pork margins were squeezed as the industry coped with an oversupply of hogs and depressed prices. This was partially offset in the second half of the year as herd liquidations reduced live hog availability and had the impact of improving selling prices. Excluding the extra week in fiscal 2009, volumes declined 7% as 6% fewer head were processed compared to the prior year.

Both years reflect nearly even impacts of impairments and restructuring charges from the closing of the Sioux City plant this year and the Pork Group restructuring plan, which primarily impacted last year's results.

Export volume declined 17% for the year. Losses from the Chinese and Russian border closings early in fiscal 2010 were partially replaced by demand in other markets during the year. Though down, exports volume remained strong in historic terms.

Packaged Meats

Packaged meats operating profits declined from last year's record results due to considerably higher raw material costs. Operating margins remained historically strong at $.14 per pound, or 7.6 per cent of sales, and continued to benefit from the restructuring plan which enhanced pricing discipline, rationalized unprofitable business and lowered overhead.

Over teh whole year, packaged meats reported another record year. Operating profits improved by $165.8 million, or 52 per cent, to a record $484.9 million, or 9.4 per cent of sales. Margins improved $.07 per pound to $.17 per pound for the year.

Pricing discipline and planned rationalisation of low margin business resulted in increased profits, even as sales volumes declined seven per cent, excluding the additional week last year. Restructuring charges of $67.1 million are included in last year's results while $13.4 million are included in the current year.


International segment results were well above those of a year ago driven by strong profits in Poland where operating profit improved $10.7 million on a 26 per cent volume increase. Campofrío Food Group results improved despite recessionary conditions throughout Western Europe.

Over the year, the international segment operating profit was positively impacted by record results in Poland, with 21 per cent volume increases, and an improvement in equity income as Campofrío Food Group benefited from merger synergies and cost reduction programmes


Hog Production

Hog Production results dramatically improved in the fourth quarter as live hog market prices in the U.S. increased 23% to $52 per hundredweight compared to $43 per hundredweight last year. Domestic raising costs decreased to $53 per hundredweight from $62 per hundredweight in the prior year.

A sharp rise in hog futures at the end of fiscal 2010 created a $58.1 million unfavorable mark-to-market adjustment in the Hog Production segment's open derivative contracts. Most of the current fourth quarter loss was the result of this mark-to-market adjustment and $9.1 million in charges associated with a new Hog Production cost savings initiative. This initiative is a long-term program to improve the segment's overall cost structure. The benefits will take effect over several years.

International hog production operations continued to show improvement with a $10.2 million increase in operating profits over last year's fourth quarter. Hog operations in Romania and Poland also delivered strong performance.

Hog Production operating losses for the year declined due primarily to significantly lower feed costs. Domestic raising costs decreased to $54 per hundredweight from $61 per hundredweight in the prior year. Improvements in raising costs were partially offset by lower live hog market prices, which decreased to $44 per hundredweight compared to $48 per hundredweight last year.

International hog production operations dramatically improved in fiscal 2010 contributing an improvement of $108.3 million to the segment. Hogs sold in Poland and Romania combined increased by seven per cent and hog prices were at record highs.


Butterball, LLC results were positively impacted by lower live bird pricing. Prior year results include losses from live cattle operations which were liquidated in the first quarter of fiscal 2010.

Operating results for the year in the Other segment improved due to the prior year inclusion of losses related to the company's live-cattle operations, as well as improvements in Butterball, which reflected significantly lower raw material costs.

"While the banner headline for fiscal 2011 is likely to be 'Hog Production has returned to profitability,' we are focused on continuing to maximie margins in our Pork segment, leveraging our restructured Pork Group, and investing in strategic brands for top line growth. Raw material costs will be higher and there will be pressure on margins; however, we expect to continue to deliver very solid earnings to our shareholders in this business," said Mr. Pope.

"We look forward to the return to profitability in the Hog Production segment. We do not see significant herd expansion on the horizon, which should stabilize hog supplies at healthier price levels. Corn prices have remained below $4 a bushel without much upward pressure; however, the EPA has indicated that they will announce their decision on increasing ethanol blending rate from 10% to 15% in July. An increase will pressure corn pricing," he continued.

"Given current favorable industry conditions and declining hog slaughter levels, as well as the considerable cost and operational improvements we have accomplished to date, we believe that Smithfield is poised to deliver a strong year in fiscal 2011," he concluded.

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