June 17, 2011

 

Smithfield's profit breaks record

 

 

Smithfield Foods Inc. announced its record financial outcome for its fiscal 2011, ended May 1, with net income of US$521 million, or US$3.12/share, on sales of US$12.2 billion.

 

For the fourth quarter, Smithfield earned US$98.4 million, or US$0.59/share, on consolidated sales of US$3.1 billion. It was the fourth consecutive quarter of record year-over-year earnings.

 

Much of the credit goes to the company's pork segment, for which earnings improved 77% over fiscal 2010, the packaged meats segment and exports, CEO C. Larry Pope said.

 

"The fundamentals have been very good for most of this fiscal year, mostly related to the fresh pork complex, bolstered by the strong export environment as well as some changes relative to supply and demand in the domestic market," Pope said.

 

Closing the company's facility in Sioux City, Iowa, made a difference to the market in the US almost immediately, Pope said.

 

"I have never seen margins at this level for this length of time in the fresh pork business," he added.

 

In packaged meats, Smithfield has been successful in passing increased raw materials costs through to the consumer. The strength of the company's consumer brands is clear, Pope said, in the double-digit increases in volume in its branded products; Smithfield plans to increase its spending on consumer marketing by 18% in fiscal 2012.

 

Even Smithfield's hog production unit is profitable, despite an increase in corn prices.

 

"We have nice hedges and we expect hog production to remain profitable through the next fiscal year," Pope said. He later indicated that Smithfield has hedges for about half of its corn needs at below-market prices and protection for the whole year. After the run-up in corn prices in 2008, and their subsequent fall, Smithfield found itself struggling with expensive contracts for much of its feed, which took a toll on the bottom line for more than a year.

 

Pope revisited his recent decision to end Smithfield's bid for Spain's Campofrio, of which Smithfield owns 37%. He emphasised that the decision was due to turmoil in Western Europe, and not because Campofrio itself had significant operating problems. "We have a continuing interest in it, but the timing on the transaction was not right and I will not go back to it until I have better clarity on where the western European markets are going to go," he said.

 

In addition to improved operating results, Smithfield reduced debt by repurchasing US$391 million of 2013 and 2014 notes in fourth quarter. It also retired US$913 million of total debt during fiscal year, improving liquidity and lowering interest expense.

 

Smithfield Foods on Thursday (Jun 16) also announced a share repurchase programme of up to US$150 million of its common stock over the next 24 months. The company intends to buy the stock using cash on hand. The new authorisation replaces a previous share repurchase programme.

 

"We think the stock is significantly undervalued," Pope said. "We could be on a share buyback programme very quickly."

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