Smithfield profit trips on price pressures

by Erica Shaffer
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Smithfield butcher's cut bacon
A sharp increase in supplies of hogs has pressured prices for pork.

SMITHFIELD, Va. – Smithfield Foods’ net income for the third quarter dropped 46 percent as expanded supplies of hogs pressured pork prices. For the three months ended Sept. 27, Smithfield reported net income of $83.3 million for the quarter compared to $155.3 million in the year ago period.

Sales in the company’s Fresh Pork segment retreated 16 percent to $1.21 billion compared to $1.44 billion in the third quarter of 2014. Results were partially offset by a 15 percent increase in volume. Operating profit climbed to $2 per head from a $2 loss per head on lower hog prices, the company said, which offset the impact of lower meat prices. The company processed 7.2 million in hogs in 2015, up 15 percent from hogs processed a year ago.

Packaged Meat sales slipped 6 percent to 1.63 billion from 1.733 billion a year ago. The company attributed the decline to an 11 percent decrease in average selling prices, which were partially offset by a 5 percent increase in volume. Operating profit eased to 17 cents per lb. from 18 cents per lb. Despite the lower sales, packaged meats remain a real growth opportunity, the company noted.

“Our most exciting growth prospect is the ongoing development of our packaged meats business,” Smithfield said. “Although we have experienced meaningful and consistent improvement in packaged meats margins, we believe significant growth potential remains.

“We will continue to strengthen our consumer-focused marketing programs and promote innovation to improve our product mix toward branded, value-added products. We expect these actions to result in continued broad-based gains in packaged meats sales, volume, market share, distribution and margins.”

Live hog market prices dragged on sales in Smithfield’s Hog Production segment, where the company reported a 5 percent decline in sales for the quarter. Head sold during the quarter totaled 3.7 million which was 12 percent higher than a year ago. Smithfield said the effects of porcine epidemic diarrhea virus (PEDv) largely drove changes in sales volumes and market prices.

“In 2014, the spread of PEDv in the US reduced hog supplies and lead to higher hog and meat prices,” Smithfield said in its earnings announcement. “In 2015, the hog herds have recovered and the supply increase has yielded lower market prices.”

Sales in the company’s International segment fell by $76.5 million, or 17 percent, on changes in foreign exchange rates, Smithfield said. Lower pork market prices in Europe and lower equity income from the company’s joint ventures in Mexico negatively impacted operating profit in the segment. Foreign currency translation also impacted operating profits by about $2.3 million due to a stronger US dollar, Smithfield said.

“We will continue to sharpen our strategic focus and drive operational improvements across our entire platform, including our fresh pork, hog production and international divisions,” the company concluded. “We are focused on growth and believe that Smithfield is in an ideal position to continue to achieve strong results for the remainder of 2015 as well as 2016.”

For the nine months ended Sept. 27, Smithfield reported net income of $284.5 million compared to $403.5 billion for the period ended Sept. 28, 2014. Adjusted EBITDA for the period was $702.9 million compared to $878.8 million a year ago.

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