Smithfield Foods Inc.'s (SFD) fiscal first-quarter earnings
tumbled 36% as the pork processor--which is in the midst of selling
itself to a Chinese meat producer--was again hit by declining pork
exports, while hog production raising costs increased.
Smithfield's pork exports have fallen because of a weakening yen
that has dampened demand from Japan, as well as tighter rules in
China and Russia designed to block imports of pork raised using
ractopamine. The medicated feed additive, used to produce lean
muscle in hogs instead of fat, is permitted and widely used in the
U.S. but is banned in much of the rest of the world.
On Friday, Smithfield Chief Executive C. Larry Pope
characterized the operating environment in fresh pork and its
international business as "difficult" and the quarter as
"lackluster," noting that normal seasonal weakness in fresh pork
was exacerbated by declines in Japan, China and Russia. In
addition, he said higher raising costs in Smithfield's hog
production businesses in Eastern Europe and Mexico hit
international segment earnings.
"The key driver of our business continues to be packaged meats
where we achieved solid margins, while growing volume, as well as
market share and distribution," Mr. Pope said. He added the first
quarter should mark the low point of the year for Smithfield.
The earnings report comes as Smithfield--which has discontinued
quarterly conference calls--awaits a ruling on its acquisition by
China's Shuanghui International Holdings Ltd. from the Committee on
Foreign Investment in the U.S. That deal, agreed to in May, is
worth $34 a share, or $4.7 billion, in what would be the biggest
Chinese takeover of a U.S. company if it is completed. Analysts see
the CFIUS review--which is largely expected to culminate in favor
of the purchase--as the main remaining hurdle to consummating the
deal.
For the quarter ended July 28, Smithfield reported a profit of
$39.5 million, or 27 cents a share, compared with a year-earlier
profit of $61.7 million, or 40 cents a share.
Sales jumped 9.8% to $3.39 billion.
Analysts polled by Thomson Reuters had most recently forecast
earnings of 47 cents on revenue of $3.19 billion.
Gross margin narrowed to 9% from 10.7% as input costs jumped
12%.
Total pork sales--the biggest contributor to Smithfield's
revenue--rose 9.6%, reflecting growth in both fresh pork and
packaged meats.
The hog-production segment's sales jumped 20%, while its
international business recorded growth of 8.4%.
Packaged-meat operating margins were 7% as volume climbed 2%.
Fresh-pork operating margins were negative 3%, although the company
processed 4% more hogs. Hog production operating margins were 8%.
Live hog market prices jumped 6% to $71 per hundredweight, while
raising costs climbed 2% to $68.
The quarterly report comes a few days after an activist
shareholder seeking to break up Smithfield said earlier this week
that it has received indications of interest from possible buyers
that imply a value substantially above the purchase price already
agreed to with Shuanghui. The shareholder, Starboard Value
LP--which holds a 5.7% stake in Smithfield--is working with
possible buyers to construct an alternative all-cash proposal from
a single entity that could be considered superior to the one with
Shuanghui.
Shares fell by eight cents to $33.88 in recent premarket
trading. The stock has risen 3.3% in the past three months.
Write to Saabira Chaudhuri at saabira.chaudhuri@wsj.com
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