Smithfield Foods reported record fiscal 2012 first quarter results. All comparisons are to the first quarter of fiscal 2011.
Sales for the first quarter of fiscal 2012 were $3.1 billion, up 7%, resulting from higher average unit selling prices in the Pork segment and higher live hog market prices. The company reported net income in the current quarter of $82.1 million ($.49 per diluted share) compared to net income of $76.3 million ($.46 per diluted share) last year.
Current results include noteworthy items affecting results, including a $39.0 million charge for the company's Missouri litigation, $5.7 million of Campofrío-related (CFG) transaction costs and Hog Production impairment charges of $4.3 million related to production cutbacks in Missouri. In addition, the effective income tax rate was higher than previously provided guidance and had an unfavorable impact on earnings. The table below shows these items in relation to reported earnings for the current quarter resulting in a non-GAAP adjusted diluted EPS of $.69.
"The record performance of our business for the past five quarters is the direct result of the successful execution of our strategy to position Smithfield as a leading packaged meats company by increasing customer-focused marketing of our core brand portfolio, improving our overall cost structure and fortifying our balance sheet, plus the benefit of favorable industry conditions," said C. Larry Pope, president and chief executive officer.
"We are supporting our packaged meats business by boosting our sales and marketing budget to activate our brands and fuel innovation to bring us closer to our consumers. This is promoting growth and strengthening our position in many important product categories, including bacon, dinner sausage, hotdogs and portable lunches," he remarked.
"Notably, sales volume and dollars expanded for all of our 12 core brands in the first quarter: Farmland, Smithfield, Eckrich, Armour, John Morrell, Cook's, Gwaltney, Kretschmar, Curly's, Carando, Margherita, and Healthy Ones. In addition, our Armour LunchMakers, Curly's Tub BBQ, Eckrich Hotdogs and Smoked Sausage, Kretschmar Deli, and Smithfield Marinated lines posted double-digit growth," Pope said.
"At the same time, balanced supply and demand fundamentals coupled with strong exports yielded solid fresh pork margins. Our international group capitalized on robust global demand for pork to drive double-digit increases in export volume and dollars, as well as market share gains in several key regions," Pope continued.
"Low global protein inventories continued to support historically high live hog prices. This strong pricing environment, combined with profitable hedge positions, generated robust hog production profitability that was well above the normalized range, despite higher cash grain prices. We continue to work to improve the profitability of our Hog Production segment through our ongoing cost savings initiative," he said.
"The actions we took last year to improve our balance sheet resulted in a significant reduction in interest expense in the first quarter. We also utilized excess cash to redeem the remaining $78 million of our outstanding 2011 bonds, repurchase $34 million of stock and invest an additional $100 million in our pension plans, all while maintaining over $1.2 billion in liquidity. Subsequent to quarter-end, we repurchased $31 million of additional shares and redeemed $13.1 million of our highest coupon bonds," Pope stated.
Although the first quarter is generally the most difficult quarter for fresh pork, operating margins were at the high end of normalized range at 3%, or $6 per head, despite a 19% increase in live hog market prices. Results were bolstered by stable protein supplies and solid exports. Sales tonnage and head processed decreased 2%.
The company's financial results for the first quarter of fiscal 2012 were negatively impacted by a $39.0 million charge relating to its previously disclosed Missouri nuisance litigation. The company recorded this charge in response to recent developments in the last few weeks, as substantial progress was made in global settlement negotiations with counsel for substantially all of the plaintiffs. As a result of this progress, the company believes a global settlement with those plaintiffs is probable, although it has not yet entered into a global settlement agreement and it is possible that it will be unsuccessful in doing so. If a settlement is reached, the company intends to seek recovery under various insurance policies and believes that it could eventually recover a substantial portion of the settlement payment.
"Looking forward, we have strong momentum in our Pork segment supported by our solid brands and positive industry fundamentals. We are working hard to grow our packaged meats business through brand activation and innovation. We are targeting 3% sales volume growth in our packaged meats business in fiscal 2012 and are committed to continuing to deliver quality and consistent margins," Pope said.
"We expect that positive industry fundamentals in our fresh pork and hog production businesses will continue — export demand should remain robust and we do not foresee any hog supply expansion on the horizon. High feed costs will continue to pose a challenge, but we have hedged raising costs in the mid to high $60s per hundredweight for fiscal 2012," he commented.
"We are very optimistic about the future of our business and look forward to continuing to execute our strategy to be a leading branded packaged meats company. Fiscal 2012 is off to a great start with strong earnings growth and we expect this year to be another very good year for the company," Pope concluded.