Source:  Lisa M. Keefe, MEATINGPLACE.COM. 6/16/09

Smithfield Foods Inc.'s earnings report Tuesday morning was awful — but still a little better than analysts had expected.

The company reported its first net loss in 30 years: $190.3 million in the red for fiscal 2009, or $1.35 per share, on revenues of $10.45 billion. That compares with net income of $128.9 million, or 96 cents per share, on revenues of $9.6 billion for fiscal 2008. (Fiscal 2009, ended May 3, was a 53-week fiscal year, compared with fiscal 2008, which was 52 weeks in length.)

But the company's fourth-quarter losses, at 55 cents per share, were slightly better than analysts had expected. The consensus estimate was a loss of 60 cents per share, according to Thomson Reuters.

Still, management emphasized the positive in an earnings call with analysts and media Tuesday morning, emphasizing solid-to-excellent results in the fresh and processed pork units, international units and exports — every business unit but in animal production.

"Anything that breathed lost money," Smithfield CFO Robert "Bo" Manly said during the call.

3 percent sow herd reduction

In an effort to shore up its hog production operations, Smithfield CEO C. Larry Pope said the company would reduce its sow herd by an additional 3 percent, even in the wake of last fiscal year's 10 percent reduction. The reductions already have begun, he said.

In answer to an analyst's question, he said the 3 percent figure represented the number of sows being raised at a facility in Texas specifically for Seaboard Inc. "We can eliminate that process and cull the costs to get the full benefit," Pope said.

He acknowledged, though, that it's not a reduction calculated to have a guaranteed effect on hog prices overall. "Is it the right number? Who knows? If 10 percent didn't fix [the hog industry], then another 3 percent won't fix it," he said.

The dirt on debt covenants

Management was clear, meanwhile, that its debt covenants in fiscal '09 were met, and that they do not expect to violate any financial covenants in fiscal 2010, either.

"Meat processing and swine production have shown big improvement; liquidity is up and our covenants are being met," Manly said. "We've shed non-core assets and are looking for more opportunity. We are in compliance with our covenants and expect to remain so."

The company continues to talk with lenders about restructuring its loans, and Manly said the talks were "ongoing and fruitful.

"We will continue to be financially proactive," he said.

Looking ahead

Fiscal 2010, then, "will be better than last year, although that's not saying much," Pope said.

In the coming months, Smithfield is looking to lower its debt-to-capital ratio to below 50 percent, from the current 54 percent.

But it still faces historically low pork prices in the wake of the H1N1 pandemic scare, at a time when prices typically rise in anticipation of the summer grilling season. And grain prices are rising, under pressure by late planting and the Obama administration's intent to increase ethanol requirements in an effort to reduce emissions.

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