Smithfield Foods Inc.
(
SFD
) posted better-than-expected adjusted earnings (excluding early
debt extinguishment charges) of 61 cents per share in the second
quarter of fiscal 2013, much ahead of the Zacks Consensus
Estimate of 44 cents. However, the results lagged the prior-year
earnings of 76 cents per share by 19.7% due to sluggish sales and
weak margins in hog production business.
During the quarter, total sales slipped 2.6% year over year to
$3.23 billion. The decline was due to soft sales in all the
categories, lower meat and hog prices, which offset higher
volumes. Total sales also lagged the Zacks Consensus Estimate of
$3.30 billion.
Operating profit declined 20.6% to $178.3 million during the
quarter due to rising costs and lower sales. Operating margin
declined 100 basis points to 6%. Weak hog production margins
overshadowed the improved margins of fresh pork, packaged meat
and international segments.
Segment and Margin Details
Pork:
Sales in the Pork segment declined 1.9% to $2.72 billion compared
with the previous year period. While sales of fresh pork slipped
4.3% to $1.24 billion, sales of packaged meat increased
marginally to $1.484 billion compared with $1.482 billion in the
prior-year period.
However, operating margin in the pork segment increased 100
basis points to 7% on the back of robust 8% fresh pork margins
and improved packaged meat margins of 7%. Widespread domestic
demand as well as continued strong export demand for pork
improved fresh pork margins in the second quarter, following a
disappointing first quarter. Packaged meats margins improved on
the back of lower raw material costs, improved product mix and
higher strategic investment in advertising.
Hog Production:
Hog Production plummeted 6.5% year over year to $734.0 million in
the second quarter of fiscal 2013. The segment's operating
margins were also disappointing at negative 4% compared to
positive margins of 8% in the prior-year quarter. Higher raising
costs and lower live hog prices were the key reasons for the
decline, which offset the improved operating efficiencies from
hog production cost saving initiatives.
International Segment:
The segment reported a decline of 8.3% to $358.6 million in the
reported quarter. However, operating margins more than doubled to
11% compared with 4% in the prior-year quarter led by strong
results in the company's Eastern European hog production
operations and significant improvement in average selling prices
in Romania.
Other Financial Details
Smithfield repurchased high interest bearing debt in the
quarter, which was refinanced with a new debt at a much lower
interest rate and a longer maturity, thus reducing interest
expense by 6% in the second quarter of fiscal 2013. This reflects
the company's successful efforts in reducing leverage.
During the quarter, Smithfield repurchased 3.4 million shares
worth $67 million and 8.2 million shares subsequent to quarter
end for $174 million.
Outlook
Smithfield continues to expect packaged meat margins to
improve in the third quarter, driven by product mix and increased
marketing of its core brands. For fiscal 2013, the company
expects packaged meats margins at the high end of the normalized
range with 2-3% volume growth.
Further, decline in global pork production and higher pork
prices, especially in EU, are expected to push up demand for pork
in the US in fiscal 2013.
The company expects hog prices to normalize in the coming
quarter, making the Hog Production segment profitable. Moreover,
the company's risk management strategy will help in limiting the
rising grain cost impact.
In the International segment, both hog production and meat
processing businesses are expected to improve in Poland and
Romania.
We have a Neutral recommendation on Smithfield over the long
term. Both Smithfield and its peer
Tyson Foods Inc.
(
TSN
) hold a Zacks #2 Rank (short-term 'Buy' rating) given their
bright prospects.
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