Smithfield slumps to Q1 loss despite record processing profits

By Rory Harrington

- Last updated on GMT

Related tags: Pork, Meat

Surging profits in Smithfield Foods packaged meats business were insufficient to stop the company posting a first quarter loss topping $100m.

Smithfield’s packaged meats division posted record quarterly returns in the three month period ending August 2 as profits tripled to $107m. However, this strong return could not save the company from showing an overall loss of $107m as its hog production business was hammered by weak demand and depressed prices for fresh pork.

C. Larry Pope, President and Chief Executive at Smithfield, said: "This first quarter loss reflects the continuing adverse business environment in the hog production segment of the company's operations. While raising costs have continued to decline and the pork processing segment continues to deliver strong profits, they were not sufficient to offset the negative impact of low hog prices on the hog production business.”

Meat packing

The impressive performance in meat processing and packing came despite a 1.6 per cent drop in revenues, a 9 per cent slump in sales volume and $6m restructuring charges.

The US-based company said strong prices, combined with its huge cost-cutting programme, that has included shuttering five plants with a further one earmarked for closure in the third quarter, were instrumental in boosting the bottom line. Packaged meats profits leapt $74m year-on-year.

“Results benefited from permanent improvements in operating efficiencies and plant utilization, as well as reduced raw material costs,”​ said a company statement.

Smithfield chief Pope forecast its restructuring programme would yield significant cost savings over the next two years.

"We continue to execute the Pork Group restructuring plan on or ahead of schedule,”​ he said. “Smithfield is already benefiting from the Pork Group restructuring plan and we are on track to achieve annual cost savings of approximately $55 million, after applicable restructuring expenses, in fiscal 2010 and $125 million by fiscal 2011.”

Overseas, Smithfield’s meat processing businesses in Eastern Europe also performed well. Its operations in Poland and Romania remained profitable in the quarter despite “relatively high raw material costs”,​ said the company. Combined sales volumes in the two countries jumped 10 per cent year-on-year, with a $3.6m income contribution from CampoFrio Food Group.

Focus on processing

The Smithfield chief said the company would continue to focus on its packaged meat business as a profit driver.

“Once the Pork Group restructuring plan is complete, we expect incremental improvement in packaged meats profits of approximately $80 million annually by fiscal 2011,”​ he added.

“Although current profits are benefiting from low raw materials costs, we have permanently altered the corporate structure and manufacturing operations of our Pork segment. Given the changes we have made in all aspects of our business, we are very optimistic and enthusiastic about the potential earnings power of this company."

Hog production woes

The company’s hog production business suffered a disastrous performance as demand and prices both fell. A 34 per cent slump in pork export demand and the fallout from the outbreak of H1N1 flu were major factors, said Smithfield. Shipments to China were especially hard-hit. Revenue and sales declined by 24 and 23 per cent respectively.

Pope said the industry had reached a tipping point where “the hog production industry will very likely continue to incur losses until an industry-wide liquidation occurs”,​ adding, “we believe the industry has finally reached an inflection point where liquidation must occur”.

Related topics: Processing & Packaging

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