SMITHFIELD, Va. – Smithfield Foods, Inc. reported a surge in second quarter earnings as strong domestic and international demand for pork and higher prices for hogs combined to lift profits.
For the second quarter ended June 29, 2014, Smithfield reported net income of $142.9 million compared to $32.4 million a year ago. Sales gained 14 percent to reach $3.8 billion.
"Our record results and strong earnings growth in the second quarter were driven by several key factors," said C. Larry Pope, president and CEO. "Fundamentals were very supportive, particularly in our hog production segment, with tight supplies due to PEDv and strong demand both domestically and internationally, which pushed hog production margins to record levels."
Smithfield, a subsidiary of Hong Kong-based WH Group Ltd., changed its reportable business segments. The company's former Pork segment now consists of two reportable segments, Fresh Pork and Packaged Meats. Starting with the second quarter, the company's reportable segments are Fresh Pork, Packaged Meats, Hog Production, International and Corporate.
Smithfield's Hog Production segment set an all-time record for operating margins, according to the company. Operating margins were 15 percent, or $37 per head. Tight supplies caused by the impact of porcine epidemic diarrhea virus (PEDv) supported exceptionally high prices, while hog raising costs declined 3 percent to $66 per cwt.
Operating margins in the Fresh Pork segment advanced 2 percent to $5 per head on tight supplies of hogs. The company processed 8 percent fewer hogs, but heavier weights offset volume declines.
The company's Packaged Meats business recorded operating margin gains of 6 percent, or 15 cents per pound. Notable increases were in bacon, hams, hot dogs and dry sausages, the company said. Ham volume jumped due to the later timing of Easter.
Smithfield noted gains in retail and foodservice sales volume and dollars. The company's Smithfield, Kretschmar, Curly's, Carando and Cook's brands delivered volume growth at retail. Smithfield brand bacon and Curly's BBQ expanded market share, while the company expanded distribution of Eckrich cooked dinner sausage, Smithfield and Farmland bacon, Farmland ham steaks, Curly's BBQ and Armour portable lunches.
"We have restructured and streamlined our fresh pork and packaged meats operations and are benefiting from our long-term strategy to intensify our consumer-focused marketing programs and foster innovation to improve our product mix toward differentiated, branded and value-added products," Pope said. "The continued successful execution of this plan yielded consistently solid margins in our packaged meats business again this quarter, as well as gains in volume, market share and distribution across a number of our core brands and key product categories."
Looking ahead, Pope said market fundamentals continue to be supportive of Smithfield on a number of fronts. Domestic demand has been strong, and demand from other countries remains strong despite a ban of US pork by Russia. Pope said these factors, combined with lower domestic protein production, should support high prices for hogs and pork for the remainder of 2014 and beyond.
"Notwithstanding a bullish hog production outlook, PEDv concerns seem to have thwarted market expansion for now," Pope noted. "In addition, corn is currently trading at the lowest level in three years. This should translate into normalized fresh pork margins and high, above normalized hog production margins in 2014."
Synergies with Smithfield parent company WH Group are taking hold. Pope said Smithfield branded premium chilled fresh pork sold at Smithfield kiosks in mainland China has reported strong sales and customer traffic.
"We opened three new kiosks in July, bringing our total number of kiosks to 21, and plan to continue to expand throughout China to cover the major first-tier and second-tier cities by the end of the year," he said. The early success of our Smithfield kiosks in China underscores the synergistic effect of our merger with WH Group."