Smithfield Foods reports Q1 net earnings of US$105.3M, up 479% from year-ago period as sales rise 3% to US$3.4B

SMITHFIELD, Virginia , May 16, 2014 (press release) – Smithfield Foods, Inc., a wholly owned independent subsidiary of WH Group Limited, today reported record 2014 first quarter results. All comparisons are to the first quarter of 2013. Sales for the first quarter of 2014 were $3.4 billion, up 3%. Net income was $105.3 million, compared to net income of $18.2 million last year.

Highlights

Net income +479% to first quarter record high of $105.3 million

Sales +3% to $3.4 billion

Consolidated operating profit +234% to $196.4 million

Operating profit and margins higher in every business segment

Total Pork operating profit +40% to $180.2 million

Fresh Pork operating profit +171% to $59.0 million

Packaged Meats operating profit +13% to $121.2 million

Hog Production operating profit increased to $9.5 million

International operating profit +158% to $36.9 million

Export sales volume +17%

Reduced interest expense 5%

"We are pleased to report a record first quarter with strong margin gains across all segments of our business. Our results reflect outstanding execution at the operating level, better markets and an improved export environment owing, in good measure, to our strategic combination with WH Group. On that front, we are opportunistically pursuing exciting growth opportunities in the enormous and rapidly growing Chinese pork market that we expect will yield dividends for years to come," said C. Larry Pope, president and chief executive officer.

He continued, "I am particularly pleased with our progress in the packaged meats segment. Notwithstanding an overall volume decline related to the late timing of the Easter holiday, we nonetheless achieved broad-based gains in market share and distribution in key product categories and, importantly, we were able to maintain margins in the face of historically high raw material prices. We are continuing to build our brands through investments in targeted, high-impact consumer marketing, as well as capital improvements in our manufacturing platform."

"At the same time, our fresh pork margins were above seasonal norms, as meat values outpaced the historical run up in live hog prices. Our international segment continued as a solid contributor to our results and our hog production business turned profitable," Mr. Pope added.

"Finally, operational improvement plans in place at both the farm and plant level are beginning to show in our results. Our recent merger of two of our independent operating companies, Smithfield Packing Company and Farmland Foods, into one is improving our competitiveness and we are continuing our drive to achieve least cost and best in class operations," he remarked.

"I applaud the entire Smithfield team for delivering a record first quarter with gains across our entire platform. This achievement underscores our focus and strength as a global food company as part of WH Group," Mr. Pope said.

Business Segment Discussion

First Quarter Results

Pork

Fresh Pork

Fresh pork operating margins improved to 4%, or $8 per head. Tight protein supplies combined with relatively strong demand resulted in an 18% increase in the USDA pork cutout and allowed the company to pass along higher hog prices. The strategic merger with WH Group yielded synergies with exports up double-digits on significantly higher volumes to China, among other markets. The company processed 1% fewer hogs.

Packaged Meats

Packaged meats operating margins grew to 8%, despite a considerable increase in raw material costs. Volume declined 9% mainly due to notably lower ham volumes because of the later timing of Easter. However, bacon and sausage volumes improved considerably, with Smithfield bacon volume up over 20%. The company also delivered volume growth in its Armour, Eckrich, Margherita and Healthy Ones brands. Kretschmar, the company's premium deli brand, achieved growth in both sales volume and dollars.

In addition, the company gained market share in Eckrich cooked dinner sausage, Smithfield bacon and ham steaks, Curly's BBQ and Margherita dry sausage. The company also broadened distribution of Eckrich cooked dinner sausage, Smithfield and Farmland bacon, Farmland ham steaks, Curly's BBQ, Margherita dry sausage, Armour portable lunches and Smithfield marinated pork.

Hog Production

Hog Production operating margins rose to 1%, or $2 per head. Year over year, live hog market prices increased 16% to $71 per hundredweight, while raising costs declined 4% to $65 per hundredweight. The company sold fractionally fewer hogs, but heavier market weights offset the shortfall. Results reflected ongoing risk management activities to counter market volatility.

International

International operating margins improved to 10% on strong hog production results, both in Poland and Romania. Sales in the company's meat operations were very strong, with a double-digit volume gain across the entire international meat complex. Operating results also improved markedly in the company's joint venture operations in Mexico.

Outlook

"2014 is off to a great start with record first quarter earnings. Looking forward, continued strong fundamentals driven by reduced hog and pork supplies, organic growth opportunities, as well as synergies with WH Group should fuel significantly improved year over year results," said Mr. Pope.

"Hog production volumes will be lower due to PEDv, pushing hog and pork prices higher. The combination of lower corn costs and higher hog prices will generate very strong hog production margins. At the same time, as part of WH Group's global platform, we will continue to efficiently allocate resources by adjusting our Chinese exports to maximize value. We also continue to grow our business organically by strengthening our brand positioning and lowering costs through improved efficiencies and productivity across all business segments. As such, we expect normalized operating margins, on a full year basis, in our fresh pork, packaged meats and international businesses despite higher input costs," he continued.

Mr. Pope noted, "We are encouraged by the ongoing collaboration and partnership with Shuanghui Development, our sister company in China, in the areas of marketing, engineering and procurement, to name a few. We will continue to leverage our vertically integrated platform to supply high quality, ractopamine-free pork to Shuanghui in China, while continuing to meet the needs of our domestic customers. In addition, we now have access to the largest cold chain logistics network in China, as well as a robust sales and distribution network, both owned by Shuanghui. We can utilize these networks to service Smithfield customers globally. This market access in China is second to none and represents an enormous growth opportunity for Smithfield."

"All indications are that 2014 will be a very strong year for the company and the strategic merger with WH Group should yield benefits that will continue far into the future," he concluded.

About Smithfield Foods

Smithfield Foods is a $14 billion global food company and the world's largest pork processor and hog producer. In the United States, the company is also the leader in numerous packaged meats categories with popular brands including Smithfield®, Eckrich®, Farmland®, Armour®, Cook's®, Gwaltney®, John Morrell®, Kretschmar®, Curly's®, Carando®, Margherita®, and Healthy Ones®. Smithfield Foods is committed to providing good food in a responsible way and maintains robust animal care, community involvement, employee safety, environmental, and food safety and quality programs. For more information, visit www.smithfieldfoods.com and www.smithfieldcommitments.com.

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