Smithfield Foods reported fiscal 2013 fourth quarter and full year results, with its pork segment delivering its second best year in company history. All comparisons are to the fourth quarter and full fiscal year 2012.

"Driven by both top and bottom line growth in packaged meats, these earnings reflect our continued transformation into a more value-added consumer packaged meats company. For the full year, packaged meats operating profit increased nearly $70 million, or 17 percent, year over year and volume was up 4 percent. Our core brand volume grew even more substantially, up 5 percent," said C. Larry Pope, president and chief executive officer.

Smithfield continued to deliver consistent growth in its packaged meats business in fiscal 2013, with increased volume and market share and broader distribution of its core brands. Packaged meats sales dollars and volume grew across all trade channels and in eight of the company's 12 core brands. "Double-digit gains were realized for Smithfield bacon, Armour dry sausage, and Smithfield and Farmland marinated pork. In the deli channel, our   Eckrich deli meats also finished the year up double-digits," Pope said.

Market share improved in bacon, cooked dinner sausage, dry sausage and marinated pork. In addition, the company broadened distribution of its core brands in a number of key product categories, including cooked dinner sausage, deli meats, dry sausage, marinated pork, packaged lunchmeat and portable lunches.

Pope continued, "Fiscal 2013 was a challenging year in hog production with higher grain prices due to last summer's drought and, more recently, export market disruptions. For the industry, pork exports were down to nearly every major market in the fourth quarter with volumes to China and Russia falling over ractopamine certification requirements and the weakening yen resulting in lower shipments to Japan. This decline in pork exports pushed production back onto the domestic market and negatively impacted our hog production and fresh pork businesses in the fourth quarter."

Sales for the fourth quarter of fiscal 2013 were $3.3 billion, up 3 percent. Net income was $29.7 million ($.21 per diluted share) in the fourth quarter, compared to net income of $79.5 million ($.49 per diluted share) last year. The fourth quarter of fiscal 2012 included a $16.8 million benefit, or $.06 per diluted share, attributable to insurance reimbursements related to the settlement of the company's Missouri litigation.

Fiscal 2013 sales increased 1 percent to $13.2 billion. Net income was $183.8 million ($1.26 per diluted share) in fiscal 2013, compared to net income of $361.3 million ($2.21 per diluted share) last year.  

Fourth quarter results

Fresh pork operating margins improved from the prior year to 2 percent, or $3 per head, as live hog prices fell 6 percent. Retail volume was strong, up 10 percent. The company processed 3 percent more hogs. Exports declined double digits on lower shipments to China and Russia due to new ractopamine certification requirements and Japan as the yen depreciated versus the dollar. Smithfield resumed shipments to China in mid-March, sourcing product from its plants in Clinton and Tar Heel, North Carolina and Milan, Missouri, which are 100 percent ractopamine-free.

Packaged meats operating margins were solid and in line with the prior year at 7 percent, or $.16 per pound. Volume grew 4 percent and was up year over year across all key trade channels for the fourth consecutive quarter. The company delivered volume growth in nine of its twelve core brands: Smithfield, Gwaltney, Kretschmar, Armour, Eckrich, Curly's, Farmland, Margherita and Healthy Ones. In addition, it gained market share in cooked dinner sausage, dry sausage, ham steaks and marinated pork, with notable double-digit growth in its Eckrich cooked dinner sausage, Armour dry sausage and Smithfield and Farmland marinated pork. The company also broadened distribution in the bacon, deli meats, dry sausage, hot dogs, packaged lunchmeat, portable lunches and marinated pork categories.

International operating margins declined to 2 percent largely from higher feed costs in the company's hog production operations. On a constant currency basis, sales increased 6 percent led by higher volumes in Poland and price increases in Romania. Recessionary pressures and high raw material costs continued to negatively impact Campofrío results.

The company's risk management strategy for hog production continued to mitigate losses to produce results that were better than the industry average with an operating margin of 5 percent, or $11 per head. Year over year, live hog market prices decreased 6 percent to $59 per hundredweight, while raising costs rose 5 percent to $68 per hundredweight. Head sold increased 5 percent.

Full year results

Fresh pork operating margins declined to 3 percent, or $6 per head. Larger domestic pork supplies resulting from lower exports pushed the USDA pork cutout down 7 percent year over year, while live hog prices fell only 6 percent. Retail sales volume increased double digits. Excluding the carcass volume last year, exports increased 4 percent year over year. The company processed 3 percent more hogs.

Packaged meats operating margins grew to 8 percent, or $.17 per pound, on 4 percent higher volume. Sales and volume grew across all trade channels and in eight of the company's twelve core brands: Smithfield, JohnMorrell, Kretschmar, Armour, Eckrich, Carando, Farmland and Margherita. Higher quality and more consistent earnings continued to result from market share and distribution gains across a number of key product categories.

Hog production operating margins were 4 percent or $7 per head. Losses were significantly diminished by the company's risk management strategy. Year over year, live hog market prices decreased 6 percent to $61 per hundredweight, while raising costs rose 6 percent to $68 per hundredweight. Head sold increased 1 percent.

The   international segment operating profit more than doubled to $108.2 million primarily on strong profitability in Romania, as well as the company's Polish hog production operations. Recessionary pressures and higher raw material costs continued to weigh on Campofrio's margins.

Outlook

The company will continue to execute its strategic growth plan to improve its earnings stream and migrate Smithfield further towards a consumer packaged meats company. The fundamental tenets of this plan - as outlined last quarter - include the following:

  • Increase capital investment to improve competitive cost structure and achieve least cost and best in class operations,
  • Continue a higher level of investment in direct-to-consumer marketing programs to build brand equity and grow sales,
  • Establish a culture of innovation to build strong product pipeline to drive packaged meats volume and margin,
  • Emphasize hog production assets as strategic point of difference, and
  • Pursue a diversified mergers and acquisitions strategy in packaged meats and value-added products.

"We believe in this plan's ability to deliver broad-based gains in volume, market share and distribution across our core brands and key product categories. The combination of those gains, an improving product mix toward differentiated, branded and value-added products, as well as loosening export market restrictions in our fresh pork business and higher contributions from our international meat processing business, should provide significant long-term growth potential for Smithfield," said Pope.

Smithfield and Shuanghui merger

As previously announced on May 29, Smithfield and Shuanghui International Holdings Limited entered into a definitive merger agreement that values Smithfield at approximately $7.1 billion, including the assumption of Smithfield's net debt. Under the terms of the agreement, which has been unanimously approved by the boards of directors of both companies, Shuanghui will acquire all of the outstanding shares of Smithfield for $34  per share in cash.

The closing of the transaction is subject to certain conditions, including, among others, approval by Smithfield's shareholders, the receipt of approval under applicable U.S. and specified foreign antitrust and anti-competition laws, the Committee on Foreign Investment in the United States and other customary closing conditions. The transaction is expected to close in the second half of 2013.