Fresh pork, hogs business hit Smithfield earnings

by Keith Nunes
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SMITHFIELD, Va. – Challenging business conditions in its fresh pork and hog production business units pushed Smithfield Foods’ earnings lower during the first quarter of fiscal 2013. For the quarter ended July 29, the company recorded net income of $61.7 million, equal to 40 cents per share on the common stock. The result compared unfavorably to the same period of the previous year when net income was $82.1 million, or 50 cents per share.

Sales for the quarter were $3,091.3 million, a very slight decline compared with the first quarter of fiscal 2012 when sales were $3,094.2 million.

The company said the first quarter of every fiscal year is the most challenging for its fresh pork business. This year the margins were below the normalized range at a loss of $2 per head due to an 8 percent decline in the US Department of Agriculture pork cutout outweighed a 4 percent drop in live hog market prices, according to the company.

The company’s hog production business operating margins declined from the prior year to $6 per head, or 3 percent, resulting primarily from 6 percent higher raising costs. Live hog market prices and raising costs averaged $66 per cwt and $67 per cwt, respectively.

Smithfield’s packaged meats business provided a bright spot during the first quarter. Margins improved to a record 21c per lb., or 10 percent, according to the company. Lower raw material costs, an enhanced product mix, a more coordinated and focused sales strategy, and a greater investment in advertising all positively impacted results, the company said.

“Despite headwinds in our hog production business, improving fresh pork results combined with robust packaged meats profitability and higher packaged meats volumes, as well as strong international segment profitability should fuel solid results in fiscal 2013,” said C. Larry Pope, president and chief executive officer.

He added that “We have emerged from the seasonally weak period in fresh pork and believe that lower protein supplies and continued strength in export demand should support fresh pork profitability within the normalized range for fiscal 2013. In fact, fresh pork margins have improved considerably since the end of the quarter. In addition, we are working hard to enhance our product mix, achieve further operational efficiencies and lower our costs in this segment.

“Although the hog production segment will be negatively impacted by higher grain prices resulting from the drought, favorable grain hedges should keep raising costs in the mid-$60s per hundredweight throughout fiscal 2013. This compares to projected industry raising costs in the mid $70s per hundredweight, according to leading industry experts. Moreover, we expect that global protein production will rationalize in the mid-term given the current grain environment to yield higher prices that will partially offset the impact of rising costs.”

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