Smithfield fiscal Q1 profit halved; sees Europe, ConAgra unit buys boosting future earnings

By Paul Deckelman

New York, Aug. 23 - Smithfield Foods Inc. reported fiscal 2007 first-quarter earnings Wednesday that were only half those of a year earlier. But while company president and chief operating officer C. Larry Pope told analysts on a conference call he is "not pleased with the results," he nonetheless feels that the Smithfield, Va.-based international livestock and meatpacking company is well positioned to take advantage of market trends going forward, particularly in the wake of its expansion of its operations in Europe, its exit from what it saw as a volatile and uncertain market in Brazil and the anticipated completion this quarter of its pending acquisition of ConAgra Foods Inc.'s refrigerated meats business in the United States.

"I am bullish and optimistic" about the company's future, he declared.

Those sentiments were echoed by Smithfield's outgoing chief executive officer, Joseph W. Luter III, who hands the CEO post over to Pope at the end of the month.

"It's been a great 39-year run," he said, referring to his tenure as the head of the pork, beef and poultry processing company. "I am very optimistic that we have made the right long-term decisions," he said in his valedictory on this, his final conference call as CEO. Luter will remain with the company as non-executive chairman of the board.

Among the decisions which he and Pope said had to be done to enhance the company's long-term profitability was the exit from Brazil, a country which is "totally export dependent" and thus potentially subject to adverse effects from world trade politics.

"We saw more opportunity in Eastern Europe," he said, with Smithfield moving in the past few years to establish and strengthen its operations in Poland and Romania. The latter country, he noted, is "pork negative" - in other words, it does not currently produce enough pork to meet its own domestic needs, so even if Smithfield exports nothing from there, there is an under-served domestic market to absorb its hog production.

In Western Europe, Luter and Pope pointed to the company's recent acquisition of the Sara Lee meats business, which was accomplished by buying out its joint venture partner.

And domestically, Smithfield is in the process of closing the acquisition of food processing giant ConAgra's refrigerated meats business, which includes its well-known "Butterball" turkey brand. "This is a premium turkey brand, which commands a premium price," Pope pointed out. "This [transaction] will be very, very good for us as we head into the fall holiday season," including Thanksgiving, the most important event on the turkey industry calendar, and a month later, Christmas and New Year's, which also see brisk turkey sales. Smithfield already has its own "Carolina" turkey brand; its combination with "Butterball" will give the company the consolidated top position in the industry.

The fall-winter holidays are also a strong selling time for hams and other types of processed pork, in contrast to the current "summer doldrums," as Pope called them.

Net income halved

In the '07 fiscal first quarter ended July 30, Smithfield reported net income of $24.6 million (22 cents per diluted share) versus year-ago net income of $49 million (44 cents per share), as sales in the latest period eased to $2.8 billion versus $2.9 billion last year.

However, Pope noted that the latest net results were impacted by the company's unprofitable Quik-to-Fix Foods Inc. business, which it has since sold, with the transaction for substantially all of the unit's assets and operations closing shortly after the end of the quarter.

On a continuing operations basis, excluding Quik-to-Fix, income for the quarter was $38.9 million (35 cents per share) versus the year-earlier $49 million/44 cents per share figure. In the quarter, Smithfield recognized a $10.4 million after-tax write down on the Quik-to-Fix assets in anticipation of the sale and an after-tax loss from discontinued operations of $3.9 million.

Smithfield's chief financial officer, Dan Stevens, noted that the company's borrowing levels increased during the quarter by $140 million, to $2.7 billion, due to higher levels of working capital and capital expenditures. He forecast that borrowings during the current fiscal second quarter will rise by $63 million due to the recent closing on the European joint venture acquisition.

He said that interest expenses were $3.5 million more quarter to quarter, pretty much in line with company expectations, and due solely to increased borrowings. The company's average borrowing rate was actually lower, Stevens said.

The increase in borrowings caused Smithfield's debt-to-capital ratio to rise slightly to 57% from 56% at the end of the year.

New euro revolver to back growth

Stevens also noted that the company was closing this week on a €300 million revolving credit facility in Europe, in support of the expansion of the company's projects there.

"We did this deal to give us additional borrowing capacity in an area where we expect to have significant growth in the next few years," Stevens said.

Pope added that "we've got an awful lot going on in the U.S. and overseas. One of the benefits of doing a European financing is we're borrowing some of these monies in foreign currencies in order to match up these exposures we have in foreign currencies versus foreign denominated debt."

He said that as Smithfield increases its European operations, "we will be looking to that portion of the world as a source of capital."

Pope added "we are keeping our balance sheet in check. We're financing as we need to, and we're taking the opportunity to borrow in foreign currencies."

He said that with the financing moves combined with the company's other initiatives - its European expansion, its acquisition of ConAgra unit Cook's Hams earlier this year and now, ConAgra's refrigerated meats business, including "Butterball"-and with the continued expectation of strong hog prices and better results from its beef operations, "we're building a nice company for the future."

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