Smithfield Foods, a wholly owned independent subsidiary of WH Group Limited, on August 8 reported record 2014 second quarter results with a net income of $142.9 million, compared to a net income of $32.4 million for the same period in 2013. Sales for the second quarter of 2014 were $3.8 billion, up 14 percent.
"Our record results and strong earnings growth in the second quarter were driven by several key factors. Fundamentals were very supportive, particularly in our hog production segment, with tight supplies due to PEDv (porcine epidemic diarrhea virus) and strong demand both domestically and internationally, which pushed hog production margins to record levels,” said C. Larry Pope, president and CEO of Smithfield Foods. “At the same time, our management is intensely focused on implementing our organic growth plan, which is working. We have restructured and streamlined our fresh pork and packaged meats operations and are benefiting from our long-term strategy to intensify our consumer-focused marketing programs and foster innovation to improve our product mix toward differentiated, branded and value-added products. The continued successful execution of this plan yielded consistently solid margins in our packaged meats business again this quarter, as well as gains in volume, market share and distribution across a number of our core brands and key product categories. I am very pleased with the consistency of our packaged meats margins, particularly during a period of extremely high raw material costs. Our strong performance was also propelled by our continued close collaboration with WH Group and Shuanghui, our sister company in China, to achieve synergies."
Reportable Segments
Prior to the second quarter of 2014, the company conducted its operations through four reportable segments: Pork, Hog Production, International and Corporate. Over the past several years, the Pork segment has undergone significant structural change and consolidation. Therefore, the former Pork segment now consists of two reportable segments; the Fresh Pork segment and the Packaged Meats segment. As such, beginning with the second quarter of 2014, the company's reportable segments are: Fresh Pork, Packaged Meats, Hog Production, International and Corporate. The changes to the company's reportable segments have been applied retrospectively for all periods presented.
Fresh Pork
Fresh pork operating margins improved to 2 percent, or $5 per head. Tight supplies combined with resilient domestic and export demand pushed the USDA cutout 30 percent higher and offset a comparable increase in live hog prices. The company processed 8 percent fewer hogs, but heavier weights compensated for a significant portion of the volume decline. Foodservice sales volume and dollars increased.
Packaged Meats
Packaged meats operating margins were 6 percent, or 15 cents per pound. Volume grew 6 percent with notable increases in bacon, hams, hotdogs and dry sausage. Ham volume was significantly higher owing to the later timing of Easter. The company delivered normalized margins and volume growth in the face of an unprecedented rise in raw material costs.
Retail and foodservice sales volume and dollars grew. At retail, the company delivered volume growth in its Smithfield, Kretschmar, Curly's, Carando and Cook's brands. In addition, the company expanded market share in Smithfield bacon and Curly's BBQ. The company also broadened distribution of its Eckrich cooked dinner sausage, Smithfield and Farmland bacon, Farmland ham steaks, Curly's BBQ and Armour portable lunches.
Furthermore, Smithfield gained meaningful hotdog volume, market share and distribution resulting from its long-term agreement with Nathan's Famous, which commenced in March, to become its exclusive licensee to manufacture and sell Nathan's branded hotdogs, sausage and corn beef products in the retail market.
Hog Production
Hog production operating margins were 15 percent, or $37 per head, an all-time record. Year over year, live hog market prices increased 30 percent to $88 per hundredweight, as tight supplies due to PED virus supported exceptionally high prices. Raising costs declined 3 percent to $66 per hundredweight. A 10 percent decline in head sold was partially offset by 3 percent heavier weights.
International
International operating margins grew to 8 percent primarily because of significantly higher earnings in the company's vertically integrated operations in Poland and Romania. In both countries, lower grain costs drove a double-digit drop in raising costs and more than offset a decline in live hog prices, leading to considerably improved hog production profitability. At the same time, lower live hog prices and enhanced pricing discipline fueled better fresh meat earnings. Equity income from the company's Mexican joint ventures also increased on higher hog prices resulting from PED virus in Mexico.
Subsequent to quarter end, Campofrío Food Group's delisting from the Spanish stock market was approved. Sigma Alimentos, the largest producer and distributor of refrigerated and frozen food in Mexico, and Smithfield now hold a combined share of over 98 percent of Campofrío, with Smithfield continuing to hold an approximately 37 percent interest.
Outlook
"Market fundamentals continue to be supportive of our business on a number of fronts. Domestic protein demand is impressive. Although Russia has banned U.S. pork imports, international demand from other countries remains strong. This, combined with lower domestic protein production, should support high hog and pork prices for the duration of 2014 and beyond. Notwithstanding a bullish hog production outlook, PEDv concerns seem to have thwarted market expansion for now. In addition, corn is currently trading at the lowest level in three years. This should translate into normalized fresh pork margins and high, above normalized hog production margins in 2014," said Pope.
He continued, "Smithfield remains focused on maximizing its existing business through increased consumer marketing programs, product innovation and capital investment to further establish itself as a leader in consumer packaged meats. We expect to deliver packaged meats margins in the normalized range in 2014. We see enormous growth potential for our U.S. business through organic improvement, particularly in packaged meats."
"Synergy opportunities with WH Group are advancing. For example, Smithfield branded premium chilled fresh pork sold at Smithfield kiosks in Mainland China has been well received by consumers with strong sales and customer traffic. We opened three new kiosks in July, bringing our total number of kiosks to 21, and plan to continue to expand throughout China to cover the major first-tier and second-tier cities by the end of the year. The early success of our Smithfield kiosks in China underscores the synergistic effect of our merger with WH Group. As part of WH Group's global platform, we will continue to create value through organic growth and synergy initiatives, while leveraging the benefits of positive market fundamentals in the U.S. I am very optimistic about the earnings power of this company as we build on our record performance in the first half of the year," he concluded.
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