Tough Q1 for Smithfield Foods

Sep. 9.09 | About: Smithfield Foods (SFD)

SmithField Foods Inc. (SFD), producer and marketer of fresh and packaged meat products in the U.S. and internationally, reported results for its first quarter of fiscal 2010 with a net loss of 56 cents per share. The loss was a penny higher than the Zacks Consensus Estimate of 55 cents. The loss was also greater than net of loss of 21 cents reported in the comparable prior-year quarter.

Despite controlled production, the company reported a loss primarily due to higher one-time items and lower hog prices domestically due to oversupply, the impact of the H1N1 (commonly referred to as "swine flu") pandemic and the recession.

Net sales for the quarter declined 13.6% year-over-year to $2.7 billion attributable to lower volumes and currency fluctuations, especially in international operations and lower prices of fresh pork. Furthermore, the recent outbreak of swine flu also had a negative impact on the top line.

Segment wise, Fresh Pork reported lower volumes, and average unit selling prices due to reduced exports and a marginal drop in domestic foodservice demand attributable to the recession.

In the Packaged Meats segment, the company posted strong profits driven by pricing and rationalization of unprofitable business. Further, the segment also benefited from permanent improvements in operating efficiencies and plant utilization, as well as reduced raw material costs.

The International segment’s profits grew, driven by the company's meat processing operations in Poland and Romania. These operations were profitable despite relatively high raw material costs. In addition, sales volume in these two countries improved a combined 10% year-over-year.

The Hog Production segment continued to post losses in the quarter, despite cost reduction initiatives. The segment was further affected by a decrease in live hog market prices year-over-year due to oversupply.

In addition, the current quarter's loss also includes non-cash impairment charge of $34.1 million related to the write-down of farm assets of non-core hog operations. Moreover, the company reduced the size of its U.S. sow herd by 10% in response to overall industry conditions and to modestly reduce its exposure in the live production business.

The Other segment benefited from production cutbacks and lower grain prices, both of which had a positive impact on the business. Smithfield sold all its remaining cattle during the quarter, and exited from the business. The sell-off of the cattle increased the segment's sales year-over-year.

Based on the results of the first quarter, the company provided an outlook for fiscal 2010. Management states that the hog production industry will continue to incur losses until an industry-wide liquidation happens. Since current live hog market prices are significantly below raising costs for the foreseeable future, Smithfield believes that the industry has reached an inflection point where liquidation must occur.

Therefore, in response to the industry dynamics, the company has altered its hog production strategy by modestly reducing its exposure to hog and grain markets through sow reductions and farm closings.

However, the packaged meats business is expected to continue to churn profits. Further, after the company completes its Pork Group restructuring, it expects incremental improvement in packaged meats profits of approximately $80 million annually by fiscal 2011.