Smithfield Foods yesterday [Thursday] reported that fiscal 2002 Q3 net income rose 46% to US$54.5m, or US$.48 per diluted share, excluding the impact of a non-recurring gain in the prior year.
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In the Q3 of fiscal 2001 the company reported a non-recurring gain, net of expenses, of US$43.6m, or US$.39 per diluted share, from the sale of IBP common stock. Including the gain on sale of common stock, reported net income was US$80.8m, or US$.73 per diluted share, for the Q3 last year.
Excluding unusual items, net income for the first nine months of fiscal 2002 exceeded the previous year by 35%. Net income totaled US$170.7m, or US$1.56 per diluted share, prior to two unusual items in fiscal 2002 and the US$43.6m non-recurring gain in fiscal 2001. The net result of two unusual items in the current year added US$1.2m after-tax to net income, or US$.01 per diluted share.
Q3 sales were US$2.1bn, up 36% from US$1.5bn in the same period a year ago, reflecting sales from the company’s newly acquired beef operations and an improved product mix from the company’s emphasis on its branded and value-added product categories. Sales for the first nine months of fiscal 2002 were US$5.4bn, compared to US$4.4bn last year, a 23% increase. The sales increase was due to the sales of newly-acquired companies, increased volumes in the base business and improved selling prices and product mix in the company’s value-added product categories.
Operating profits in the Meat Processing Group (MPG) increased 79% to US$100.3m from US$56m a year ago, reflecting a favorable operating environment for fresh pork and a strong emphasis on margin improvement in both the fresh and processed meats categories. During the fall holiday season, the company saw a continuing shift in consumer trends in the smoked meats category away from commodity whole hams to value-added, ready-to- cook, further processed and sliced products, such as spiral and boneless hams. Fresh pork volume, excluding the impact of the Canadian plant sold last year, was about the same as the prior year while processed meats volume rose 3%, due primarily to sales of newly acquired further processed meat operations. Processed meats volumes in the base business grew 1%.
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By GlobalDataSmithfield Foods’ newly formed beef processing division had sales of US$526.8m and operating earnings of US$10.1m. This division was formed after the acquisition of Moyer Packing Company in June and Packerland Holdings in October. As the company previously forecast, Packerland results were accretive to earnings in its first complete quarter after being acquired. The beef processing division has annualized sales of about US$2bn and a 7% share of industry processing capacity.
Hog Production Group (HPG) operating earnings were US$30.7m compared to US$31m in the Q3 last year. These strong results were achieved during a period in which hog prices fell almost 5% and many producers were not profitable. The results reflect significant synergies generated from the combination of the company’s three production operations into one (Murphy-Brown) and greater coordination between the company’s hog production and meat processing operations. These synergies have resulted in improved production efficiencies and lower raising costs while, at the same time, provided production opportunities for the processing plants. These represent long-term, sustainable advantages.
“The improved profitability reflects our strategy to transform our meat processing operations from a provider of commodity fresh pork to a marketer of higher margin, value-added products,” said Joseph W. Luter, III, chairman and CEO.
The company detailed the following value-added accomplishments in the quarter:
* Smithfield Packing entered the Chicago market for the first time through a new relationship with Jewel/Osco stores. Additionally, as part of a major marketing introduction in New York City, Smithfield Lean Generation and other Smithfield products now are being offered in Pathmark, King Kullen, Gristede’s, Shop Rite and Grand Union stores. Smithfield sliced bacon is now the number two brand in New York City.
* In aggregate, Smithfield Foods’ brands gained significant share nationwide in the sliced bacon category.
* John Morrell reached national distribution with its Curly’s brand barbeque in the food service channel.
* Gwaltney achieved national distribution in bacon, hot dogs and sliced bologna through Wal-Mart.
* A new addition at the Patrick Cudahy manufacturing facility will be completed next month, increasing pre-cooked bacon capacity by 40% and dry sausage capacity by 25%.
“These results demonstrate that there is substantial earnings power in each segment of our company,” said Luter: “In the Q3 live hog prices reached their lowest levels since our vertical integration strategy was put in place, testing our business model. The Meat Processing Group responded with very strong margins during the quarter and the Hog Production Group produced profits that were almost the same as the prior year in spite of the lower prices.”
Losses at the company’s Animex operations in Poland increased in the Q3 as the country continued to experience overcapacity in the meat processing industry in the face of weak demand. The net impact of the Animex loss in the quarter was a loss of US$.06 per diluted share. The company is implementing plans that are expected to make the Polish operations profitable in the next year.
At the beginning of the current fiscal year, the company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS 142). In accordance with the provisions of SFAS 142, the company discontinued the periodic amortization of goodwill but is now required to annually review recorded goodwill for potential impairment. Had SFAS 142 been effective in the previous fiscal year, net income and diluted earnings per share, excluding the gain on sale of IBP, inc. common stock, would have been US$39.5m, or US$.36 per diluted share, and US$132.9m, or US$1.20 per diluted share, for the Q3 and nine-month periods in the prior year, respectively.
Nine-Month Segment Results
For the first nine months of fiscal 2002, MPG operating income grew 72% over the prior year to US$138.6m. HPG operating earnings of US$249.4m increased 16%.
“I am very pleased with our results, particularly in light of the general slowdown in the overall economy,” said Luter: “We have focused our attention on the details of running our businesses, by removing costs and improving margins.”
New Share Repurchase Authorization Approved
The Board of Directors has approved a new two million share repurchase program. Under this new program, the company intends to purchase its outstanding common shares from time to time in the open market or through privately negotiated transactions, subject to market conditions. Including the new program, Smithfield Foods currently has an authorization to purchase 2,594,730 shares. The company has purchased 4,194,600 shares in this fiscal year.
Comment on Johnson-Grassley Senate Farm Bill Amendment
Smithfield Foods shares the Senate’s desire to protect the interests of the family farm. We take great pride in the fact that Smithfield Foods today works in productive partnership with over 1,300 independent farms. We provide these farms with capital, technology and the security of a reliable, well- financed customer who is committed to buying their product in good times and bad. Further, as the world’s largest hog producer, we have a clear common interest with other hog producers in ensuring that hog farming remains a viable economic enterprise.
Through the integration of hog production and meat processing, Smithfield Foods has made a significant investment to provide consumers with the highest quality healthy products grown to our demanding specifications for quality, consistency and food safety. As drafted, the Johnson-Grassley amendment to the Senate Farm Bill will put food quality, safety and consistency in jeopardy, while doing little, if anything to achieve its stated purpose of serving the interests of the family farm. The Johnson-Grassley amendment does not pose a significant threat to the operations of Smithfield Foods. The company emphasized that most informed observers understand that the Johnson- Grassley amendment is far from becoming law, and that it is not contained in the House version of the Farm Bill. The company believes that the Johnson- Grassley amendment will not be adopted by the conference committee of the House and Senate.
Smithfield Foods has delivered a 28% average annual compounded rate of return to investors since 1975. In the last 15 years, the company’s share price has outperformed the S&P 500 Index by more than 350%. With annual sales of US$8bn, Smithfield Foods is the leading processor and marketer of fresh pork and processed meats in the United States, as well as the largest producer of hogs.
