December 5, 2008

Smithfield Foods Inc. (SFD), the world's largest pork producer, said Thursday (December 4) it was shying away from acquisitions and cutting more capacity to improve pricing power.

 

Soaring feed costs have squeezed liquidity at the company, countering strong export markets and higher margins for its processed pork operations.

 

Chief Executive Larry Pope said on a call with analysts that Smithfield was not in any mergers-and-acquisitions discussions following a period of intense activity that had seen it boost its core pork business and divest its beef operation.

 

The meat-processing sector has been hit hard by the combination of high animal feed costs and tough pricing conditions, slicing market values of the largest US companies by 50 percent or more this year.

 

Pilgrim's Pride Corporation (PPC), the world's largest poultry producer, filed for bankruptcy protection earlier this week, and has explored asset sales.

 

Smithfield also produces turkeys, sold under the butterball brand. Smithfield said it was in compliance with all of its bank covenants, though it remained in discussion with lenders to secure additional flexibility.

 

The company reported a 76 percent drop in fiscal second-quarter net income as feed costs surged, with a gain from selling beef operations keeping the company from falling into the red.

 

It reported net income of US$4.2 million, or 3 cents a share, for the quarter ended October 26, compared with US$17.4 million, or 13 cents a share, a year earlier. On a continuing-operations basis, Smithfield had a loss of 21 cents a share.

 

Revenue rose 15 percent to US$3.15 billion for the company, which sells products under the John Morrell, Smithfield Premium, Farmland Foods and Butterball names.

 

On average, analysts polled by Thomson Reuters expected a loss of 10 cents a share on revenue of US$3.2 billion.

 

Gross margin slid to 7.45 percent from 10.5 percent as feed costs increased. Pope said that while the next two quarters will be difficult due to grain costs, those prices have eased and hog production should turn profitable in the fiscal first quarter of next year.

 

Smithfield's hog-production operations swung to a loss in the latest quarter despite a 22 percent sales increase. Profits in pork processing were up 49 percent as sales rose 11 percent on gains internationally.

 

Shares have lost three-fourths of their value since August amid turmoil in the meat-processing industry and concerns about Smithfield's liquidity position. The company has tried to strengthen its balance sheet by selling businesses. Smithfield sold its beef-processing and cattle-feeding operations in October to Brazil's JBS SA (JBSS3.BR) for US$565 million.

 

Smithfield said that its available liquidity at the end of the quarter topped US$900 million. In mid-November, Smithfield shares plunged following a grim outlook from Tyson Foods Inc. (TSN), which projected its chicken business would absorb more losses as a result of a soft export market and tight global credit.