Packaged meats paying for Smithfield

by Monica Watrous
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Packaged meats were the bright star in Smithfield Foods' second quarter earnings.
Packaged meats were the "bright star" in Smithfield Foods' second quarter earnings.

SMITHFIELD, Va. — Smithfield Foods’ packaged meats business was the “bright star” in the recent quarter, helping to partially offset headwinds from lower pork prices and a stronger US dollar. For the second quarter ended June 28, Smithfield had net income of $104.2 million, down 27 percent from $142.9 million for the prior year period. Sales declined 9 percent to $3.49 billion from $3.81 billion. Foreign exchange translations negatively affected sales by approximately $80 million in the quarter.

“We are building a formidable, branded consumer packaged goods business, full stop,” said Ken Sullivan, executive vice president and CFO, during an Aug. 25 earnings call with financial analysts.

During the quarter, Smithfield’s packaged meats profits totaled $176.3 million, up nearly 81 percent from the year-ago total of $97.5 million. Sales dipped 11 percent to $1,545.6 million from $1.73 billion, reflecting an 11 percent decrease in average selling prices that was partially offset by a 2 percent increase in volume.

“The value-added branded CPG aspect of our business is performing exceptionally well, and we are pleased with that part of the business,” Sullivan said. “Indeed, Smithfield’s packaged meats business was the fastest-growing CPG company over the last 52 weeks, according to the last IRI data that I’ve seen. 

Ken Sullivan, CFO, Smithfield Foods
Ken Sullivan, executive vice president and CFO, Smithfield Foods

“This year the challenge has been more on the commodity-dependent side of our business, the parts of the business we have less control over; in particular the live production side. Lower prices in this part of the business have made keeping pace with last year’s record results challenging.”

Smithfield’s fresh pork segment showed a loss of $15.1 million compared with last year’s profit of $29.7 million for the second quarter. Sales were $1.36 billion, down 15 percent from $1.61 billion.

“The story here is we have 8 percent to 10 percent more hogs, and industry exports are down at the same time,” Sullivan said. “We have a lot more meat to deal with this year. Too much meat equals lower profits. It’s really not more complicated than that.”

The company’s hog production unit posted a profit of $39.1 million, following a loss in the first quarter.

“The bad news is the comparison to last year’s record profits, which totaled $129 million,” Sullivan said. “If you recall, last March began a meteoric rise in hog prices as supply fears related to PED took hold. So last year was a blowout quarter in live production. This year we made money, just not as much of it.”

Sales for the hog production segment were $784.6 million, down 8 percent from $857 million the year before.

International profit fell 56 percent to $14.8 million from $33.9 million for the comparable quarter, driven by lower pig prices. Segment sales fell to $352.5 million from $426 million, due to unfavorable foreign exchange rates.

Smithfield Foods' commodity-dependent business faced the biggest challenges in the second quarter.
Smithfield Foods' commodity-dependent business faced the biggest challenges in the second quarter.

“The big news in the international segment is that we sold our 37 percent stake in Campofrio Food Group,” Sullivan said. “CFG simply wasn’t meeting our investment targets and was no longer central to our European strategy, which is now focused on Eastern and Central Europe.”

Net income for the six months decreased 19 percent to $201.2 million from $248.2 million the year before. Results included a $12.8 million early debt extinguishment charge taken in the first quarter. Sales fell 2 percent to $7.10 billion from $7.24 billion.

“Adjusting for the FX translation effect, sales on a constant dollar basis actually would have about equaled last year’s record,” Sullivan said. “The FX translation headwind for the six-month period was about $130 million.”

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