Source:  Lisa M. Keefe, MEATINGPLACE.COM, 6/17/10

Heralding the end of the restructuring of Smithfield Foods' processing operations, CEO C. Larry Pope reported significantly improved results for fiscal 2010, while unveiling a new restructuring plan for the company's live hog operations, announcing changes in its hedging strategy, and issuing an ultimatum for its joint venture partner in Butterball.

Smithfield Foods Inc. reported a net loss of $101.4 million, or 65 cents per share, on consolidated sales of $11.2 billion for fiscal 2010, ended May 2, compared with a loss of $198.4 million on consolidated sales of $12.5 billion for the same period a year ago.

In the fiscal fourth quarter, Smithfield reported a net loss of $4.6 million, or 3 cents per share, on consolidated sales of $2.9 billion for the quarter. A year ago, Smithfield had a net loss of $81.2 million, or 57 cents per share, on consolidated sales of $2.8 billion.

On an operating basis, every segment saw year-over-year profit improvements of between 12 percent (hog production) and 42 percent (international). "Other" segment operating profits were up 108 percent, due in part to the liquidation of money-losing operations the year earlier.

"The last two years have been Smithfield's most challenging period," CFO Robert W. "Bo" Manly said in a conference call with analysts and the media. "We've emerged a strong, more balanced company."

New restructuring plan

Even as the company wraps up one lengthy restructuring process, Pope laid out plans for another, this one aimed at improving margins in the hog production segment.

"We are initiating a new hog production cost-savings initiative aimed at significantly improving our competitive position. Although the benefits will not be immediate, the long-term impact should be very beneficial," Pope said.

Manly said the total capital expenditures for the new restructuring program are expected to be $86 million spread out over three years, including a one-time charge of $43 million. However, the company expects to lower its costs in the segment by about $91 million annually, and see enhanced revenues from improved quality of the animals, he said. The company's target is to achieve before-tax earnings margins of $10 to $15 a head.

Hedging on hedging

Smithfield's fourth-quarter results were marred by mark-to-market losses of $58 million on its lean hog hedged position, due to an unexpected run-up in live hog prices. Pope pointed out in the conference call that hog prices retreated significantly shortly after the fiscal year ended.

Still, he announced the company is changing its hedging strategy, "committing that we will live closer to the cash market. Unless we see something that's an exceptional opportunity, we will not seek a large position in the market and will be largely at the mercy of the day-to-day pricing," he said.

"In the grain markets we'll be a bit more active. We will likely seek to lock in attractive pricing, but will never lock in all our position," Pope said.

The change means that Smithfield will "leave money on the table," Pope said, but the accounting for such investments is too complicated for management to be as "transparent" as it aims to be, and the change in hedging strategy is expected to boost shareholder value.

Hardball on Butterball

Finally, Pope said he has been dissatisfied with the results from Butterball, a company in which Smithfield has a 49 percent interest; Maxwell Farms LLC owns the rest of the company. The turkey processor is a valuable consumer brand turning in "commodity" results, and he announced that Smithfield made a bid for the 51 percent of Butterball the company doesn't already own.

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