February 18, 2009

Smithfield Foods, Inc. announced on Tuesday (Feb 17) a plan to consolidate and streamline the corporate structure and manufacturing operations of its pork group to improve operating efficiencies and increase utilisation.

 

The company expects the restructuring plan will result in annual cost savings after applicable restructuring expenses of approximately US$55 million in fiscal 2010 and US$125 million by fiscal 2011.

 

Smithfield Foods said that the pork group's new business model will enhance the strength of its independent operating company approach, while rationalising manufacturing operations and taking advantage of synergies in key overhead areas such as sales, marketing, purchasing and information technology.

 

Smithfield Foods president and chief executive officer C. Larry Pope said combined with the several plant closures they have made over the last three years, this restructuring should improve operating rates dramatically, allowing the company to shed low-margin business.

 

The plan includes reducing the number of independent operating companies in the pork group to three from seven.

 

Four existing independent operating companies will be combined under the various business units of The Smithfield Packing Company Inc., John Morrell & Co. and Farmland Foods, Inc.

 

John Morrell and Farmland Foods will merge their respective fresh pork sales forces and this consolidation will enable the company to serve customers with two highly competitive sales groups, Smithfield Packing Company in the East and Farmland Foods in the Midwest and West.

 

Patrick Cudahy Inc., a producer of bacon, dry sausages, hams and other specialty packaged meats, and Carando Foods, a unit of Farmland Foods producing Italian deli and specialty meats will both become part of the John Morrell Group, which includes Armour-Eckrich Meats, LLC and Curly's Foods Inc.

 

This combination will leverage the efficiencies of the packaged meats companies' manufacturing and marketing platforms.

 

Farmland Foods will strengthen its foodservice business with the assimilation of North Side Foods Corp., a large supplier to the quick service restaurant industry.

 

Cumberland Gap Provision Co., a unit of the John Morrell Group and producer of hams, sausages and other specialty packaged meats, will integrate with Smithfield Packing Company.

 

The international sales organisations that are responsible for exports of several independent operating companies will be consolidated into one group to form Smithfield Foods International Group, providing one face to overseas markets and reducing selling, general and administrative expense. This consolidation already is underway and has yielded positive results.

 

Smithfield Foods will close six plants and transfer production to more efficient facilities, increasing their utilisation rates and these plants are expected to be closed by December 2009.

 

Pope said the beginning in the first quarter of fiscal 2010, investors will be able to track packaged meats performance, as the company will begin reporting separate metrics for that component of the business.

 

As a result of the restructuring plan, the company expects to achieve a net reduction of approximately 1,800 jobs in the pork group.

 

A company spokesman said that these measures will not affect the company's hog slaughtering capacity.

 

Shares have lost almost two-thirds of their value since August as the company has tried to strengthen its balance sheet by selling businesses.

 

In recent weeks it has also received amendments under US and European credit lines that eased operating standards to keep Smithfield from violating debt covenants.

 

Meat processors have been hurt by falling margins amid weakening prices where Smithfield has also been hurt by surging grain costs the past several years.

 

Smithfield shares closed Friday (Feb 13) at US$9.57 and were not active premarket.

 

In connection with the plan, the company anticipates recording a pre-tax charge, principally related to non-cash asset write-downs, of approximately US$85 million in its third fiscal quarter ended February 1.

 

In addition, Smithfield Foods expects to record one-time pre-tax charges of approximately US$30 million as the plan is implemented over the next three quarters.

 

The company estimates that US$53 million in capital expenditures will be required relative to plant consolidations in the remainder of fiscal 2009 and in fiscal 2010.

 

Total capital expenditures are expected to remain below depreciation in this fiscal year and next.

 

With sales of US$12 billion, Smithfield Foods is the leading processor and marketer of fresh pork and packaged meats in the US, as well as the largest producer of hogs.