Smithfield Foods, Inc., a wholly owned subsidiary of WH Group Limited (HKEX:288), today reported record 2014 third quarter results. All comparisons are to the third quarter of 2013. Sales for the third quarter of 2014 were $3.7 billion, up 11%. Net income was $155.3 million, compared to net income of $35.4 million last year.
C. Larry Pope, president and chief executive officer, commented on Smithfield's record results for the third consecutive quarter: "We continue to improve our operating performance across all business segments and our record results reflect the sustained progress the company is making to realize efficiencies and strengthen our market position. We are also benefitting from a favorable operating environment with tight supplies and strong demand both domestically and internationally."
"Most importantly, momentum in our value-added packaged meats business continues to accelerate. Margins were resilient in the face of extremely high raw material costs and we realized volume, market share and distribution gains across a number of our core brands and strategic product categories. These developments underscore the evolution of Smithfield into more of a branded packaged meats company. I am extremely proud of the progress we have made in this area and applaud our team for this ongoing achievement," he said.
Fresh pork operating margins increased to (1)%, or $(2) per head. Results improved, however, over the same period last year, as lower domestic protein production and solid global demand supported a 19% jump in the USDA pork cutout. The company processed 9% fewer hogs, as the effects of PEDv disrupted pig flows, although higher hog weights provided a counterbalance and offset a portion of the reduced supplies. Foodservice sales volume and dollars grew.
Packaged meats operating margins were 6%, or $.18 per pound, notwithstanding significantly higher input costs. Volume grew 4% with double digit increases in bacon, spiral hams, hotdogs, precooked sausage, precooked entrees and precooked ribs. Retail and foodservice volume and dollars were notably higher, as were branded packaged meats sales. Retail branded sales volume of the company's Armour, Cook's, Farmland, Healthy Ones, Kretschmar and Margherita brands expanded.
The company gained market share in the following strategic product categories: Smithfield bacon, Curly's BBQ, Eckrich cooked dinner sausage, Kretschmar deli meats, Margherita dry sausage and Farmland and Smithfield ham steaks. It also expanded distribution of Smithfield and Farmland bacon,Curly's BBQ, Eckrich cooked dinner sausage, Margherita dry sausage and Farmland ham steaks. In the hotdog category, Smithfield gained significant volume, market share and distribution because of its long-term agreement with Nathan's Famous.
Hog production operating margins were record high at 17%, or $42 per head. Results were fueled by the combination of operational improvements that are driving productivity gains and favorable market conditions. Year over year, live hog market prices increased 17% to $85 per hundredweight primarily due to PEDv, which resulted in reduced hog supplies. Raising costs declined 7% to $65 per hundredweight. Head sold dropped 14%, but 4% heavier weights offset a portion of the volume loss attributable to PEDv.
International operating margins grew to 9% due to significantly higher sales volume and lower raw material costs in the company's eastern European operations as well as an increase in equity income from its joint ventures in Mexico.
"Looking forward, we will continue to sharpen our strategic focus and drive operational improvements across our entire platform. Our most exciting growth prospect is the ongoing development of our packaged meats business. With the integration of two of our independent operating companies, we have improved our competitive cost structure and aligned our organization to better serve our customers' needs. We will continue to strengthen our consumer-focused marketing programs and promote innovation to improve our product mix toward branded, value-added products. Consequently, we expect to deliver modest volume growth and very solid packaged meats margins, even in the midst of the highest raw materials cost we have ever experienced," Mr. Pope remarked.
"Barring a reemergence of PEDv, which remains a real wild card, we could see modest pork production expansion in 2015, although lower prices should spur additional export demand. Identifying and executing synergistic opportunities with WH Group and Shuanghui, our sister company in China, also remains a priority and an opportunity to bolster profitability. At the same time, our cost structure should benefit from a record large US corn and soybean crop. With the harvest well underway, corn and soybeans continue to trade near 5-year lows. All of this should allow us to maintain normalized fresh pork margins and above normalized hog production margins," he stated.
Mr. Pope concluded, "A combination of operating initiatives and synergies should continue to fuel very strong earnings for Smithfield for the remainder of 2014 and beyond."
Source: Smithfield Foods