Smithfield Foods Inc. reported strong fiscal 2013 third quarter results, driven by growth in packaged meats and solid contributions from international operations, as the company continued to execute its plan to transform into a more value-added consumer packaged meats company.

Smithfield achieved volume growth in nine of its twelve core brands in the third quarter. Specifically, its Smithfield, Eckrich, Farmland and Margherita brands were up double-digits. "Our Smithfield bacon, Eckrich dinner sausage and Armour dry sausage all achieved double-digit growth. We gained market share in the bacon, dinner sausage, dry sausage and ham steak categories. We were also very successful in broadening distribution of our core brands in a number of key product categories including bacon, dinner sausage, deli meats, dry sausage and ham steaks," said C. Larry Pope, president and CEO.

Packaged meats operating profit increased $8.5 million, or 7%, to $125.9 million in the third quarter and volume was up over 5%. Core brand volume grew even more substantially, up 6%. Packaged meats sales dollars and volume grew across all trade channels, including retail, foodservice, deli and export.

Sales for the third quarter of fiscal 2013 were $3.6 billion, up 3%, resulting from higher volumes in all segments. Net income was $81.5 million ($.58 per diluted share) compared to net income of $79.0 million ($.49 per diluted share) last year. After adjusting for Campofrío and early debt extinguishment charges, adjusted EPS in the third quarter of fiscal 2012 was $.69 on a non-GAAP basis.

Fiscal 2013 third quarter earnings were positively impacted by a lower than expected effective tax rate. The majority of the lower rate benefit is attributable to increasing profits from the company's international operations, which are taxed at lower marginal rates. In addition, tax law changes enacted in early January as part of the American Taxpayer Relief Act contributed to lowering the quarterly effective rate by approximately 5% ($.04 per diluted share).

Fresh pork operating margins were solid at 4%, or $7 per head, but declined from the prior year. Larger industry pork supplies pushed the USDA pork cutout down 5%, while live hog prices fell only 2%. Retail sales volume increased double digits. Export demand across a number of markets was greater than a year ago and substantially offset the absence of Chinese carcass sales this year. Excluding the carcass volume last year, exports increased 19% year over year. The company processed 3% more hogs.

Packaged meats operating profit improved 7% to $125.9 million. Packaged meats margins were 7%, or $.15 per pound, with strong 5% volume growth across a number of key product categories, core brands and all trade channels. Results were driven by a combination of market share improvements and distribution gains that continued to be fueled by greater investment in marketing and product innovation. Margins also benefited from lower raw material costs. Sales of bacon, hams, sausage and precooked entrees were notably robust.

For live production, the company's risk management strategy mitigated losses in the quarter and produced results that were better than the industry average with an operating margin of (8)%, or $(15) per head. Year over year, live hog market prices decreased 2% to $60 per hundredweight, while raising costs rose 7% to $68 per hundredweight. Head sold increased 2%.

The company's International segment delivered another robust quarter with operating profit of $43.7 million. The Eastern European hog production business continued its strong performance, while packaged meats earnings in Poland grew, as did profitability in Romania. Recessionary pressures and high raw material costs continued to negatively impact Campofrío's margins.

Looking forward, Smithfield anticipates consistent growth from its packaged meats business, with increased market share and broader distribution of its core brands. "We expect margins at the high end of the normalized range with at least 2% to 3% volume growth in fiscal 2013 and for this trend to continue into fiscal 2014," said Pope.

In fresh pork, Smithfield continues to focus on improving its product mix toward differentiated, branded and value-added products, both domestically and in the export markets. "Our integrated platform is providing meaningful opportunities in this area," he commented.

Smithfield believes lower per capita protein supplies and higher prices for competing proteins should help push pork retail prices higher in calendar 2013. Although consumers are facing higher taxes and energy costs, pork at retail is priced quite competitively compared to other proteins and should provide retailers with excellent feature opportunities in the spring and summer. "Taking all of this into account, we think that fresh pork margins will continue to be in the normalized range of $3 to $7 per head in the fourth quarter, as well as in fiscal 2014 on average," stated Pope.

"Given ongoing positive fundamentals in Eastern Europe, we are confident that our international segment can continue to deliver operating profit at the high end of the normalized range in fiscal 2013 and 2014," he remarked.

"For the full fiscal year, we expect losses per head in the mid single digit range in hog production. While it is difficult to forecast hog production results for fiscal 2014 at this point, we are actively working to mitigate commodity risk in that segment and anticipate improved margins year over year," Pope said.

Smithfield is in the midst of executing a plan to improve its earnings stream and grow its business over the next several years. The plan focuses on maximizing Smithfield's existing business through increased consumer marketing programs, product innovation and capital investment. In addition, the company will target branded and value-added acquisitions to help it further establish itself as a leader in consumer packaged meats.

Pope concluded, "We are excited about the growth prospects for this company as we continue to transform Smithfield into a more value-added consumer packaged meats company. We expect solid earnings in fiscal 2013 and look forward to even stronger results next year."

Source: Smithfield Foods Inc.