Smithfield earnings surge on higher prices

by Erica Shaffer
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SMITHFIELD, Va. – Strong performance across all business segments lifted Smithfield Foods, Inc.'s third quarter earnings to record highs.

For the quarter ended Sept. 28, Smithfield reported net income of $155.3 million, up from $35.4 million a year ago. Sales rose 11 percent to $3.7 billion from $3.3 billion compared to last year.

“We continue to improve our operating performance across all business segments and our record results reflect the sustained progress the company is making to realize efficiencies and strengthen our market position,” said Larry Pope, president and CEO. “We are also benefitting from a favorable operating environment with tight supplies and strong demand both domestically and internationally.

“Most importantly, momentum in our value-added packaged meats business continues to accelerate,” he added. “Margins were resilient in the face of extremely high raw material costs and we realized volume, market share and distribution gains across a number of our core brands and strategic product categories. These developments underscore the evolution of Smithfield into more of a branded packaged meats company. I am extremely proud of the progress we have made in this area and applaud our team for this ongoing achievement.”

On a segment basis, Fresh Pork sales advanced to $1.4 billion on solid global demand for pork, which offset lower domestic protein production. Smithfield processed 9 percent fewer hogs because of the impact of porcine epidemic diarrhea virus. However, higher hog weights offset a portion of reduced supplies, the company said.

Sales in the Packaged Meats segment rose to $1.73 billion, up from $1.51 billion in the third quarter of 2013. Volume in the segment grew 4 percent with double digit increases in bacon, spiral hams, hotdogs, precooked sausage, precooked entrees and precooked ribs, the company said.

“The company gained market share in the following strategic product categories: Smithfield bacon, Curly's BBQ, Eckrich cooked dinner sausage, Kretschmar deli meats, Margherita dry sausage and Farmland and Smithfield ham steaks,” Smithfield reported. “It also expanded distribution of Smithfield and Farmland bacon, Curly's BBQ, Eckrich cooked dinner sausage, Margherita dry sausage and Farmland ham steaks. In the hotdog category, Smithfield gained significant volume, market share and distribution because of its long-term agreement with Nathan's Famous.”

Operating margins in the Hog Production segment jumped to a record high of 17 percent, or $42 per head, on a combination of operational improvements and favorable market conditions, the company said.

“Year over year, live hog market prices increased 17 percent to $85 per hundredweight primarily due to PEDv, which resulted in reduced hog supplies. Raising costs declined 7 percent to $65 per hundredweight,” the company noted. “Head sold dropped 14 percent, but 4 percent heavier weights offset a portion of the volume loss attributable to PEDv.”

International operating margins grew 9 percent on higher sales volume and lower raw materials costs in Smithfield's eastern European operations. Income from joint ventures in Mexico also contributed higher equity income.

Pope said Smithfield will continue to drive operational improvements across the company's entire platform. He characterized the ongoing development of the company's packaged meats business as the most exciting growth prospect for Smithfield. He said the company expects to deliver modest volume growth and "very solid" packaged meats margins despite the highest raw materials costs the company has ever experienced.

“Barring a re-emergence of PEDv, which remains a real wild card, we could see modest pork production expansion in 2015, although lower prices should spur additional export demand,” Pope said, discussing Smithfield's outlook. "Identifying and executing synergistic opportunities with WH Group and Shuanghui, our sister company in China, also remains a priority and an opportunity to bolster profitability. At the same time, our cost structure should benefit from a record large US corn and soybean crop. With the harvest well underway, corn and soybeans continue to trade near 5-year lows. All of this should allow us to maintain normalized fresh pork margins and above normalized hog production margins.”
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