US processor Smithfield Foods has reported strong fresh pork earnings in the second quarter, despite a 91% drop in overall earnings as a result of a debt extinguishment charge.
The company reported net income of $10.9m in Q2 2013, down from $120.7m in the same period last year. However, it said this drop was down to a pre-tax early debt extinguishment charge of $120.7m. “We took a big charge this quarter related to buying back some very high-cost debt, which was refinanced with a new piece of debt at a much lower interest rate and a longer maturity,” said CEO C Larry Pope
Overall sales for Q2 were down 2.6% year-on-year to $3.2bn, with a 2% increase in volumes offset by lower meat and live hog prices. Pork was the biggest contributor to revenue, although sales fell 1.9% to $2.72bn compared to the same period in 2011.
Within the pork segment, packaged meats put in the strongest performance, with a 2% increase in sales volumes and 7% operating margins resulting in a 33% increase in operating profit compared to Q2 last year.
“Our growth in packaged meats was broad-based, driven by a combination of brand activation, new product launches, market share improvements and distribution gains. In addition to our ongoing NASCAR sponsorship, we recently launched cause-marketing campaigns with several of our core brands, creating heightened brand awareness through millions of media impressions with consumers,” said Pope.
“We introduced a number of new products to the marketplace under our health and wellness, convenience and taste platforms with our Armour, Eckrich, John Morrell and Smithfield brands. We also gained national distribution with our Farmland and Smithfield branded All Natural Case Ready Pork at a major national retailer. Our market share in dry sausage, hot dogs and portable lunches increased and we expanded distribution in deli meats, dinner sausage, dry sausage and portable lunches. Of particular note, we continued to add to our leading position in bacon, exceeding 20% branded market share for the first time, an important hurdle to cross.”
Sales of fresh pork slipped 4.3% to $1.24bn, but “robust” operating margins of 8% meant that fresh pork profits “rebounded sharply” from the previous year, the company said. International sales fell 8.3% decline to $358.6m, but operating profits in the segment more than doubled to 11%, resutling in a 136% increase in operating profit to $40.9m.
“Our fresh pork and international businesses also delivered impressive quarters,” said Pope. “Fresh pork results rallied in the second quarter after a disappointing first quarter. Widespread retail pork feature activity fuelled domestic demand, while export demand continued to be very good, although large shipments to China in the previous year caused overall volumes to decline. Excluding the China carcase business last year, export sales rose in the quarter. We also continued to focus on moving up the value chain in our fresh pork business, while generating operating efficiencies to drive improved earnings.”
However, gains in pork were offset by poor performance by Smithfield’s hog production segment. Hog production fell by 6.5% to $734m in the period, which the company said was down to higher production costs and lower live hog prices. However, Pope said that while these results were disappointing, they were “significantly better than the industry as a whole”.
Looking to the future, Pope said the company anticipated strong results for the second half of fiscal 2013, with growth in both the packaged pork and fresh pork segments.
“In the hog production segment, we expect hog prices to recover seasonally in the second half of the fiscal year,” he added.
“Lower supplies of competing proteins should also support higher hog prices. Our risk management strategy should continue to lessen the effects of higher-priced grain on our rising costs. We expect our hog production segment to be slightly profitable by the end of the fiscal year and approximately break even for the full fiscal year.”